Management Accounting

Lecture 5
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Dr. Christine Yacoub

2 Today’s agenda
 1- Budget definition, importance, and
implementation problems

 2-Types of budgets

 3- Components of the Master Budget

 4- Steps in preparing the Master Budget

 5- Examples on Sales budget and

Cash collections
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 1- Budget definition, importance, and implementation problems

A budget is a quantitative expression of a plan of action, and aid to

coordinating and implementing the plan.

A budget provides a comprehensive financial overview of planned company

operations.

A zero-base budget is a budget that requires justification of expenditures for

every activity, including continuing activities.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 1- Budget definition, importance, and implementation problems

Advantages of Budgeting:

I. Allows planning ahead of action time.

II. Allows objectives’ communication and coordination.

III. Allows revaluation of existing activities and revaluation of possible new ones.

IV. Provides benchmarks → evaluate subsequent performance.

 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
5  1- Budget definition, importance, and implementation problems
Potential Problems in Implementing Budgets:

1. Low levels of participation in the budget process and lack of acceptance of

responsibility for the final budget.
→ Participative budgeting

2. Incentives to cheat in the budget process.

→ Budget Slack/ Budget Padding: an overstatement → budgeted costs or
understatement → budgeted revenues → easier goals.

3. Difficulties in obtaining accurate sales forecasts.

Conditions: Past Pattern of Sales, Estimates made by sales force, Economic
condition, Changes in firm prices, Competitors’ actions.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 2-Types of budgets
Businesses use different types of budgets.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
7  3- Components of the Master Budget
The master budget of a merchandizing company has the following components:
A- Operating Budget:
1 Sales budget;
2- Purchasing and cost-of-goods-sold budget;
3- Operating expenses budget; and
4- Budgeted statement of income.

B- Financial Budget:
1- Capital budget;
2- Cash budget; and
3- Budgeted balance sheet.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 4- Steps in preparing the Master Budget
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 4- Steps in preparing the Master Budget
The principal steps in preparing the master budget:
1. Basic data
a. Sales budget
b. Cash collections from customers
c. Purchases and cost-of-goods sold budget
d. Cash disbursements for purchases
e. Operating expense budget
f. Cash disbursements for operating expenses

2. Operating Budget
Prepare budgeted income statement using basic data in step 1.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 4- Steps in preparing the Master Budget
The principal steps in preparing the master budget:

3. Financial Budget

Prepare forecasted financial statements:

a. Capital budget
b. Cash budget
c. Budgeted Balance sheet
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
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 4- Steps in preparing the Master Budget

Sales Budget and Cash Collections

It is easiest to prepare budgeted cash collections at the same time as the sales
budget.

Sales budget is the starting point for budgeting because planned inventory
levels, purchases and operating expenses all depend on expected level of
sales.

Cash collections include the current month’s cash sales plus the previous
month’s credit sales.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
12  5- Examples on Sales budget and Cash collections
Example 1: Art & Crafts company was preparing its sales budget for four months starting
in April and ending in July of 2023. Expected sales in March were $40,000.
Monthly sales are forecasted as follows:
April $50,000
May $80,000
June $60,000
July $50,000
Customers pay 60% of the sales in cash and 40% are sales on credit.
Collections of credit sales lag behind sales.
Art & Crafts collects all credit accounts in the month following the sales.
The 16,000 of accounts receivable on March 31 represents credit sales made in March
(40% of 40,000).Uncollectable accounts are negligible and thus ignored.

Required: Prepare a schedule showing sales and cash collections for April,
May, June and July, 2023.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
13  5- Examples on Sales budget and Cash collections
Answer
April May June July Total
Schedule A:
Sales Budget
Credit sales, 40% $20,000 $32,000 $24,000 $20,000
Plus: Cash sales, 60% $30,000 48,000 36,000 30,000
Total Sales $50,000 $80,000 $60,000 $50,000 240,000

Schedule B:
Cash Collections
Cash sales this $30,000 48,000 36,000 30,000
month
Plus 40% of last 16,000 20,000 32,000 24,000
month’s total sales
Total Collections 46,000 $68,000 $68,000 $54,000 236,000
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
14  5- Examples on Sales budget and Cash collections
Example 2: A Kyoto Clothing Wholesaler was preparing its sales budget for the first
quarter of 2024. Forecasts sales are (in thousands of Yen):
-----------------------------------------------------
January 200,000
February 220,000
March 240,000
November had credit sales of 180 million and December had credit sales of 156
million.
Sales are 20% cash and 80% on credit. 50% of the credit accounts are collected in the
month of sale, 40% in the month following the sales, and 10% in the following month.
No uncollectable accounts are anticipated .

Required: Prepare a schedule showing sales and cash collections of January, February
and March, 2024.
 Ch. 7 Introduction to Master Budget and Preparing the Master Budget
15  5- Examples on Sales budget and Cash collections
Answer

• 40% last month January February March

credit of Jan. = Sales budget
40% x $156,000 Credit sales, 80% 160,000 176,000 192,000
of Dec. credit
Cash sales, 20% 40,000 44,000 48,000
sales = $62,400.
Total sales 200,000 220,000 240,000
• 10% of next-to- Cash collections budget
last month’s credit Cash sales this month 40,000 44,000 48,000
sale of Jan = 10%
x $180,000 credit 50% of this month's credit sales 80,000 88,000 96,000
sales of 40% of last month's credit sales 62,400 64,000 70,400
November = 10% of next-to-last month's credit 18,000 15,600 16,000
$18,000 sales
Total collections 200,400 211,600 230,400
 Thank you
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