UNIT

OPERATIONAL BUDGET
INTRODUCTION
Budget is a formal business plan.
A budget is a tool that helps managers in both
their planning and control functions.

A budget is financial plan "blueprint for

action" in the future & has 3 parts:
• Operating budget
• Cash flow budget
• Capital Expenditure Budget.
 9-3

Operating Budget
• The operating budget focuses on the income
statement and its supporting schedules.
• Although the operating budget is sometimes
called the profit plan
• The master budget is an integrated set of
operating, investing, and financing budgets for
a period of time.
• The master budget begins with preparing the
operating budgets, which form the budgeted
income statement.
 9-4

Objectives of Budgeting
Budgeting involves
•Establishing specific goals
•Executing plans to achieve the goals
•Periodically comparing actual results to the goals
In doing so, budgeting affects the following
managerial functions:
1. Planning
2. Directing
3. Controlling
 9-5

Purposes of Budgeting Systems

1. Planning
Budget
Budget 2. Facilitating
a detailed plan, Communication and
expressed in Coordination
quantitative terms, that
3. Allocating Resources
specifies how resources
will be acquired and 4. Controlling Profit and
used during a specified Operations
period of time. 5. Evaluating
Performance and
Providing Incentives
 9-6

Sales of Services or Goods

Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods

Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials

Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
 Sales
Sales
Budget Production Budget
Budget

Expected units of sales

+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
 Sales
Sales
Budget Production Budget
Budget
Direct
DirectMaterials
Materials
Purchases
PurchasesBudget
Budget

Materials needed for production

+ Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased
 Sales
Sales
Budget Production Budget
Budget
Direct
DirectMaterials
Materials
Purchases
PurchasesBudget
Budget
Cost
Costof
ofGoods
Goods Direct
DirectLabor
Labor
Sold
SoldBudget
Budget Cost
CostBudget
Budget

Selling
Selling&
& Factory
FactoryOverhead
Overhead
Administrative Cost
CostBudget
Budget
Administrative
Expenses
Expenses
Budget
Budget
 Master
Master Budget
Budget
Budgeted Income Budgeted Balance
Statement Sheet
• Sales budget
• Cash budget
• Cost of goods sold budget:
• Capital expenditure
• Production budget
budget
• Direct materials purchases
budget
• Direct labor cost budget
• Selling and administrative
expense budget
 9-11

Income Statement
Budgets
 Sales
Sales
Budget Production Budget
Budget

Expected units of sales

+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
 9-13

Sales Budget
Breakers, Inc. is preparing budgets for
the quarter ending June 30.
Budgeted sales for the next five months
are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.
 9-14

Example: Sales Budget

April
April May
May June
June Quarter
Quarter

Budgeted
Budgeted
sales
sales (units)
(units) 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Selling
Selling price
price
per
per unit
unit $$ 10
10 $$ 10
10 $$ 10
10 $$ 10
10
Total
Total
Revenue
Revenue $$200,000
200,000 $$500,000
500,000 $$300,000
300,000 $$1,000,000
1,000,000
 Sales
Sales
Budget Production Budget
Budget
Direct
DirectMaterials
Materials
Purchases
PurchasesBudget
Budget

Materials needed for production

+ Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased
 9-16

Production Budget
The management of Breakers, Inc. wants
ending inventory to be equal to 20% of
the following month’s budgeted sales in
units.
On March 31; 4,000 units were on hand.

Let’s prepare the production budget.

 9-17

Production
From
sales
Budget
budget
April
April May
May June
June Quarter
Quarter
Sales
Sales ininunits
units 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Add:
Add: desired
desired Ending inventory becomes
end.
end. inventory
inventory 10,000
10,000 6,000beginning 5,000
6,000 5,000
inventory 5,000
5,000
the next
Total
Total needed
needed 30,000
30,000 56,000
56,000 35,000
month
35,000 105,000
105,000
Less:
Less: beg.
beg.
inventory
inventory 4,000
4,000 10,000
10,000 6,000
6,000 4,000
4,000
Units
Units to
tobe
be
produced
produced 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000

March 31
ending inventory
 Sales
Sales
Budget Production Budget
Budget
Direct
DirectMaterials
Materials
Purchases
PurchasesBudget
Budget
Cost
Costof
ofGoods
Goods Direct
DirectLabor
Labor
Sold
SoldBudget
Budget Cost
CostBudget
Budget

Selling
Selling&
& Factory
FactoryOverhead
Overhead
Administrative Cost
CostBudget
Budget
Administrative
Expenses
Expenses
Budget
Budget
 9-19

Direct-Material Budget

••At
At Breakers,
Breakers, 55 pounds
pounds of
of material
material are
are
required
required per
per unit
unit of
of product.
product.
••Management
Management wants
wants materials
materials on
on hand
hand at at the
the
end
end of
of each
each month
month equal
equal to
to 10%
10% ofof the
the
following
following month’s
month’s production.
production.
••On
On March
March 31,
31, 13,000
13,000 pounds
pounds of of material
material areare
on
on hand.
hand. Material
Material cost
cost $.40
$.40 per
per pound.
pound.

Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget
budget..
 9-20

Direct-Material Budget
From our
production
budget

10% of the following March 31

month’s production inventory
 9-21

Direct-Material Budget
July
July Production
Production
Sales
Salesinin units
units 25,000
25,000
Add:
Add: desired
desired ending
ending inventory
inventory 3,000
3,000
Total
Total units
unitsneeded
needed 28,000
28,000
Less:
Less: beginning
beginning inventory
inventory 5,000
5,000
Production
Production inin units
units 23,000
23,000

June Ending Inventory

July production in units 23,000
Materials per unit 5
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500
 9-22

Direct-Labor Budget
• At Breakers, each unit of product requires 0.1 hours
of direct labor.
• The Company has a “no layoff” policy so all
employees will be paid for 40 hours of work each
week.
• In exchange for the “no layoff” policy, workers agreed
to a wage rate of $8 per hour regardless of the hours
worked (No overtime pay).
• For the next three months, the direct labor workforce
will be paid for a minimum of 3,000 hours per month.
 Let’s prepare the direct labor budget.
 9-23

Direct-Labor Budget

From our This is the greater of

production labor hours required or
budget labor hours guaranteed.
 9-24

Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.
 9-25

Cost of goods sold

Cost Element Qty Unit Cost Total Cost
•Direct material 5 pound 0.4 2
•Direct Labor 0.1 hour 8 0.8
•MOH cost 0.1 hour 1.8 0.18
Total unit cost 4.6 per unit
 9-26

Selling and Administrative Expense

Budget
••At
At Breakers,
Breakers, variable
variable selling
selling and
and administrative
administrative
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.

••Fixed
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
$70,000
$70,000 per
per month.
month.

••The
The $70,000
$70,000 fixed
fixed expenses
expenses include
include $10,000
$10,000 in
in
depreciation
depreciation expense
expense that
that does
does not
not require
require aa
cash
cash outflows
outflows for
for the
the month.
month.
 9-27

Selling and Administrative Expense

Budget

From our
Sales budget
 9-28

Cash Receipts Budget

••At
At Breakers,
Breakers, all
all sales
sales are
are on
on account.
account.
••The
The company’s
company’s collection
collection pattern
pattern isis::
••70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
••25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
••5%
5% is
is uncollected.
uncollected.
••The
The March
March 31
31 accounts
accounts receivable
receivable
balance
balance of
of $30,000
$30,000 will
will be
be collected
collected in
in
full.
full.
 9-29

Cash Receipts Budget

 9-30

Cash Disbursement Budget

••Breakers
Breakers pays
pays $0.40
$0.40 per
per pound
pound for
for its
its
materials.
materials.
••One-half
One-half ofof aa month’s
month’s purchases
purchases are
are paid
paid for
for in
in
the
the month
month of
of purchase;
purchase; the
the other
other half
half is
is paid
paid in
in
the
the following
following month.
month.
••No
No discounts
discounts areare available.
available.
••The
The March
March 31
31 accounts
accounts payable
payable balance
balance is
is
$12,000.
$12,000.
 9-31

Cash Disbursement Budget

140,000 lbs. × $.40/lb. = $56,000

 9-32

Cash Disbursement Budget

Breakers:
Breakers:
••Maintains
Maintains aa 12%
12% open
open line
line of
of credit
credit for
for $75,000.
$75,000.
••Maintains
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
••Borrows
Borrows and
and repays
repays loans
loans on
on the
the last
last day
day of
of the
the
month.
month.
••Pays
Pays aa cash
cash dividend
dividend of
of $25,000
$25,000 in
in April.
April.
••Purchases
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
••Has
Has an
an April
April 11 cash
cash balance
balance of of $40,000.
$40,000.
 Elite Accessories Inc.
Sales Budget
For the Year Ending December 31, 2006
Unit Sales Unit Selling Total
Product and Region Volume Price Sales

Wallet:
East………………..287,000 $12.00 $ 3,444,000
West……………….241,000 12.00 2,892,000
Total…………….528,000 $ 6,336,000
Handbag:
East………………..156,400 $25.00 $ 3,910,000
West……………….123,600 25.00 3,090,000
Total…………….280,000 $ 7,000,000
Total revenue from
Sales……………….. $13,336,000
 Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag

Expected units to be sold 528,000 280,000

From
Fromsales
salesbudget
budget
 Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag

Expected units to be sold………….528,000 280,000

Plus desired ending inventory,
December 31, 2006……………. 80,000 60,000
Total 608,000 340,000
 Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag

Expected units to be sold………….528,000 280,000

Plus desired ending inventory,
December 31, 2006……………. 80,000 60,000
Total………………………………. 608,000 340,000
Less estimated beginning inventory,
January 1, 2006…………………. 88,000 48,000
Total units to be produced…………520,000 292,000
 Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000

Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.
Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.
 Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)……..……..…….. 156,000 52,000
Handbag (Note B)……………….. 365,000 146,000

Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.
Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.
 Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)……....………….. 156,000 52,000
Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000
Total……………………………… 541,000 210,000
 Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A) …………………. 156,000 52,000
Handbag (Note B) ………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000
Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2006 18,000 15,000
Total square yards to be produced.. 523,000 195,000
 Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000
Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000
Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2006 18,000 15,000
Total square yards to be produced.. 523,000 195,000
Unit price (per square yard)…………. x $4.50 x $1.20
Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500
 Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total

Hours required for production:

Wallet (Note A)…………. 52,000 130,000

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
 Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total

Hours required for production:

Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800
hrs.
Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs
 Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total

Hours required for production:

Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800
Total……………………... 95,800 246,800

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800
hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
 Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total

Hours required for production:

Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800
Total……………………... 95,800 246,800
Hourly rate…………………… x $12.00 x $15.00
Total direct labor cost………… $1,149,600 $3,702,000
$4,851,600
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
 Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending December 31, 2006
Indirect factory wages……………………... $ 732,800
Supervisory salaries………………………... 360,000
Power and light…………………………….. 306,000
Depreciation of plant and equipment………. 288,000
Indirect materials…………………………… 182,800
Maintenance………………………………... 140,280
Insurance and property taxes………………. 79,200
Total factory overhead cost………………... $2,089,080
 Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006….. $ 1,095,600
Work in process inventory, January 1, 2006… $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)………………………………….$ 99,000

Note
NoteA:
A: Leather:
Leather: 18,000
18,000sq.
[Link].
[Link]$4.50
$4.50per
persq.
[Link]
yd
$81,000
$81,000
Lining:
Lining: 15,000
15,000sq.
[Link].
[Link]$1.20
$1.20per
persq.
[Link]
yd
18,000
18,000
Direct
Directmaterials
materials
inventory,
inventory,
January
January1,1,2006
2006
$99,000
$99,000
 Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006….. $ 1,095,600
Work in process inventory, January 1, 2006… $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)………………………………….$ 99,000

Note
NoteB:
B: Leather:
Leather: 20,000
20,000sq.
[Link].
[Link]$4.50
$4.50per
persq.
[Link]
yd
$$ 90,000
90,000
Lining:
Lining: 12,000
12,000sq.
[Link].
[Link]$1.20
$1.20per
persq.
[Link]
yd
14,400
14,400
Direct
Directmaterials
materialsinventory,
inventory,December
December31,
31,2006
2006
$104,400
$104,400
 Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006…. $ 1,095,600
Work in process inventory, January 1, 2006... $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $ 99,000
Direct materials purchases (Slide 3)…….. 2,587,500
Cost of direct materials available for use…. $2,686,500
Less direct materials inventory,
December 31, 2006 (Note B)……………. 104,400
Cost of direct materials placed in production $2,582,100
Direct labor (Slide 35)………………………. 4,851,600
Factory overhead (Slide 36)………………….. 2,089,080
Total manufacturing costs……………………. 9,522,780
Total work in process during period…………. $9,737,180
 Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006………... $ 1,095,600

Work in process inventory, January 1, 2006……….. $ 214,500

Total manufacturing costs………………………….. 9,522,780
Total work in process during period……………….. $9,737,180
Less work in process inventory, December 31, 2006 220,000
Cost of goods manufactured………………………... 9,517,180
Cost of finished goods available for sale…………... $10,612,780
Less finished goods inventory, December 31, 2006.. 1,565,000
Cost of goods sold………………………………….. $ 9,047,780
 Elite Accessories Inc.
Selling and Administrative Expenses Budget
For the Year Ending December 31, 2006
Selling expenses:
Sales salaries expense…………………………. $715,000
Advertising expense…………………………... 360,000
Travel expense…………………………………. 115,000
Total selling expenses………………………...
$1,190,000
Administrative expenses:
Officers’ salaries expense………………………. $360,000
Office salaries expense…………………………. 258,000
Office rent expense……………………………... 34,500
Office supplies expense…………………………. 17,500
Miscellaneous administrative expense………….. 25,000
Total administrative expenses…………………
695,000
Total selling and administrative expenses…………
 Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending December 31, 2006
Revenue from sales (slide 23) $13,336,000
Cost of goods sold (slide 40) 9,047,780
Gross profit $ 4,288,220
Selling & administrative expenses:
Selling expenses (slide 41) $1,190,000
Administrative expenses (slide 41) 695,000
Total sell. & Admin. Expenses 1,885,000
Income from operations $ 2,403,220
Other income:
Interest revenue $ 98,000
Other expense:
Interest expense 90,000 8,000
Income before income tax $ 2,411,220
Income tax 600,000
Net income $ 1,811,220
The
The cash
cash budget
budget isis one
one of
of the
the most
most
important
important elements
elements ofof the
the budgeted
budgeted
balance
balance sheet.
sheet. We’ll
We’ll begin
begin with
with aa
schedule
schedule of
of collection
collection from
from sales.
sales.
 Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………...$108,000 $ 124,000 $ 97,000

Note
NoteA:
A: $108,000
$108,000==$1,080,000
$1,080,000xx10%
10%
$124,000
$124,000==$1,240,000
$1,240,000xx10%
10%
$$ 97,000
97,000==$$ 970,000
970,000xx10%
10%
 Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………...$108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)…….$370,000$ 388,800 $446,400

Note
NoteB:
B: $370,000,
$370,000,given
givenas
asJanuary
January1,1,2006
2006 Accounts
Accounts
Receivable
Receivablebalance
balance
$388,800
$388,800==$1,080,000
$1,080,000xx90%
90%xx40%40%
$446,400
$446,400==$1,240,000
$1,240,000xx90%
90%xx40%40%
 Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………...$108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)…….$370,000$ 388,800 $446,400
Collections from current
month’s sales (60%)(see Note
C)…………………………… 583,200 669,600 523,800
Note
NoteC:
C: $583,200
$583,200==$1,080,000
$1,080,000xx90%
90%xx60%
60%
$669,600
$669,600==$1,240,000
$1,240,000xx90%
90%xx60%
60%
$523,800
$523,800==$$ 970,000
970,000xx90%
90%xx60%
60%
 Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400
Collections from current
month’s sales (60%)(see Note
C)…………………………… 583,200 669,600 523,800
Total receipts from sales on
account……………………... $953,200 $1,058,400 $970,200
 Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000

Note
NoteA:
A: $190,000,
$190,000,given
givenas
asJanuary
January1,1,2006
2006Accounts
Accounts
Payable
Payablebalance
balance
$204,000
$204,000==($840,000
($840,000–$24,000)
–$24,000)xx25%
25%
$189,000
$189,000==($780,000
($780,000––$24,000)
$24,000)xx75%
75%
 Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000 567,000 591,000

Note
NoteB:
B: $612,000
$612,000==($840,000
($840,000––$24,000)
$24,000)xx75%
75%
$567,000
$567,000==($780,000
($780,000––$24,000)
$24,000)xx75%
75%
$591,000
$591,000==($812,000
($812,000––$24,000)
$24,000)xx75%
75%
 Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000 567,000 591,000
Total payments………………. $802,000 $771,000 $780,000
 Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated cash receipts: January February March
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000
Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200
Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
 Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated cash receipts: January February March
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000
Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200
Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000
Selling and administrative
expenses……………………… 160,000 165,000 145,000
Capital additions 274,000
Interest expense 22,500
Income taxes 150,000
 Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated cash receipts: January February March
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000
Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200
Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000
Selling and administrative
expenses……………………… 160,000 165,000 145,000
Capital additions 274,000
Interest expense 22,500
Income taxes 150,000
Total cash payments………….$ 984,500 $1,210,000 $1,075,000
 Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated cash receipts: January February March
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000
Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200
Capital additions 274,000
Interest expense……………….. 22,500
Income taxes…………………... 150,000
Total cash payments………….$ 984,500 $1,210,000 $1,075,000

Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700

Cash balance at beginning of month 280,000 356,700 329,100
Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800
Minimum cash balance…………… 340,000 340,000 340,000
Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800
 From our Cash 9-66

Cash Budget
Receipts Budget
(Collections and Disbursements)

From our Cash Disbursements

Budget

From our Direct Labor Budget

From our Overhead Budget

From our Selling and

Administrative Expense
Budget

To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
 9-67

Cash Budget
(Collections and Disbursements)

Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.
 9-68

Cash Budget
(Collections and Disbursements)

At the end of June, Breakers

has enough cash to repay
the $48,800 loan plus interest
at 12%.
 9-69

Cash Budget
(Collections and Disbursements)
Ending cash 9-70

Cash Budget
balance for April
is the beginning
May(Financing
balance. and Repayment)
 9-71

Cost of Goods Manufactured

April May June Quarter
Direct material:
[Link] inventory $ 5,200 $ 9,200 $ 5,800 $ 5,200
Add: Materials purchases 56,000 88,600 56,800 201,400
Material available for use 61,200 97,800 62,600 206,600
Deduct: End. material inventory 9,200 5,800 4,600 4,600
Direct material used 52,000 92,000 58,000 202,000
Direct labor 24,000 36,800 24,000 84,800
Manufacturing overhead 56,000 76,000 59,000 191,000
Total manufacturing costs 132,000 204,800 141,000 477,800
Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800
Subtotal 135,800 221,000 150,400 481,600
Deduct: [Link]-in-process inventory 16,200 9,400 17,000 17,000
Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600
 9-72

Cost of Goods Sold

April May June Quarter

Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600
Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400
Cost of goods available for sale 138,000 257,600 161,000 483,000
Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000
Cost of goods sold $ 92,000 $ 230,000 $ 138,000 $ 460,000
 9-73

Budgeted Income Statement

Breakers,
Breakers, Inc.
Inc.
Budgeted
BudgetedIncome
Income Statement
Statement
For
Forthe
the Three
Three Months
MonthsEnded
EndedJune
June 30
30
Revenue
Revenue (100,000
(100,000×× $10)
$10) $$ 1,000,000
1,000,000
Cost
Costofofgoods
goodssold
sold 460,000
460,000
Gross
Grossmargin
margin 540,000
540,000
Operating
Operatingexpenses:
expenses:
Selling
Sellingand
andadmin.
admin. expenses
expenses $$ 260,000
260,000
Interest
Interestexpense
expense 838
838
Total
Total operating
operatingexpenses
expenses 260,838
260,838
Net
Netincome
income $$ 279,162
279,162
 9-74

Budgeted Statement of Cash Flows

April May June Quarter
Cash flows from operating activities:
Cash receipts from customers $ 170,000 $ 400,000 $ 335,000 $ 905,000
Cash payments:
To suppliers of raw material (40,000) (72,300) (72,700) (185,000)
For direct labor (24,000) (36,800) (24,000) (84,800)
For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000)
For selling and administrative expenses (70,000) (85,000) (75,000) (230,000)
For interest - - (838) (838)
Total cash payments (190,000) (270,100) (231,538) (691,638)
Net cash flow from operating activities $ (20,000) $ 129,900 $ 103,462 $ 213,362
Cash flows from investing activities:
Purchase of equipment - (143,700) (48,300) (192,000)
Net cash used by investing activities $ - $ (143,700) $ (48,300) $ (192,000)
Cash flows from financing activities:
Payment of dividends (25,000) - - (25,000)
Principle of bank loan 35,000 13,800 - 48,800
Repayment of bank loan - - (48,800) (48,800)
Net cash provided by financing activities $ 10,000 $ 13,800 $ (48,800) $ -
Net increase in cash $ (10,000) $ - $ 6,362 $ (3,638)
Balance in cash, beginning 40,000 30,000 30,000 40,000
Balance in cash. end of month $ 30,000 $ 30,000 $ 36,362 $ 36,362
 9-75

Budgeted Balance Sheet

Breakers
Breakers reports
reports the
the following
following account
account
balances
balances on
on June
June 30
30 prior
prior to
to preparing
preparing its
its
budgeted
budgeted financial
financial statements:
statements:
••Land
Land -- $50,000
$50,000
••Building
Building (net)
(net) -- $148,000
$148,000
••Common
Common stock
stock -- $217,000
$217,000
••Retained
Retained earnings
earnings -- $46,400
$46,400
 25%of June 9-76

sales of
$300,000

11,500 lbs. at
$.40 per lb.

5,000 units at
$4.60 per unit.

50% of June
purchases
of $56,800