Blueprint Problem: Master Budget-The Operating Budget The Budgeting Basics and the Master Budget A budget is a financial plan for the future. It is important for: planning, control, and decision making. While many small firms do not engage in formal budgeting, they should. It improves their understanding of the interrelationships among production costs and sales revenue. It also spotlights problem areas and potential cash shortages. Large firms do engage in a formal budgeting process. This process results in the master budget. The master budget is the comprehensive plan for the coming year. It can be loosely divided into the operating budget and the financial budget. The operating budget contains the budgets that pertain to the income generating activities of the firm. The financial budget consists of the budgets pertaining to the inflows and outflows of cash and of financial position. From the list below, select which of the following budgets are part of the operating budget: Budgets Select "Yes" or "No" Sales budget Cash budget Marketing expense budget Direct labor budget Administrative expense budget Production budget Direct material purchases budget Ending finished goods budget Cost of goods sold budget Budgeted balance sheet Overhead budget Budgeted statement of cash flows Budgeted income statement The first budget that must be created to develop the operating budget is the . Once that budget is created, the rest of the operating budget can be created based on those figures. While forecasting is important input to the operating budgets, forecasts may be modified by management to reflect potential company actions. The Operating Budgets: Sales, Production and Purchases Chapter 8 Homework Part 3 The Operating Budgets: Direct Labor and Overhead Budgets The direct labor budget is simpler than the production or purchases budgets because there is no beginning or ending inventory of labor. As a result, the labor budget is simply the budgeted units produced times the number of direct labor hours per unit. This can be expressed in dollars by multiplying the total hours needed times the wage rate. Suppose that a company budgeted monthly production in the first quarter of 9,600, 12, 100, and 13,050 units. Each unit takes 15 minutes of direct labor time and the average wage rate is $18 per hour. Prepare a direct labor budget by month and in total for the first quarter of the year. (Round your DLH per unit to two decimal places and round total direct labor hours to the nearest hour.) January February March Total Units to produce x Direct labor hours per unit Total direct labor hours x Wage rate Direct labor cost $ The overhead budget is very similar to the direct labor budget. It can be as simple as a list of overhead costs, or it can separate variable from fixed overhead. If variable overhead is based on direct labor hours, then the overhead budget will be done after the direct labor budget is complete. Suppose that a company budgeted monthly direct labor hours in the first quarter of 2,400 hours, 3,025 hours, and 3,263 hours. The variable overhead rate is $3.20 per direct labor hour. Fixed overhead is $3,800 per month. Prepare an overhead budget for the first quarter of the year by month and in total. (Round overhead rate to two decimal places and round all dollar amounts to the nearest dollar.) January February March Total Total direct labor hours x Variable overhead rate Budgeted variable overhead + Budgeted fixed overhead Total budgeted overhead The Operating Budgets: Marketing and Administrative Expense Budgets The marketing expense budget can be prepared in much the same way as the overhead budget. That is, variable expenses and fixed expenses are budgeted and then totaled. Suppose that a company has variable marketing expense consisting of a sales commission equal to 5% of sales revenue. Sales revenue for the first three months of the quarter equals $560,000, $580,000, and $600,000. Fixed marketing expense consists of the following monthly costs: depreciation $3,500, salaries $12,000, and advertising $5,000. Prepare a marketing expense budget for the first quarter, by month and in total. January February March Total Budgeted sales revenue x Sales commission rate Budgeted variable marketing expense $| Fixed marketing expense: Depreciation $ Salaries Advertising Budgeted fixed marketing expense Total budgeted marketing expense The administrative budget is typically a listing of line item administrative costs and the expected amounts. Administrative costs do not vary with units produced or sold, nor with direct labor hours, so they are strictly fixed. Suppose a company has the following administrative expenses per month: salaries $21,000, depreciation $8,500, insurance $2,400, and training $1,000. Prepare an administrative expense budget for the first quarter, by month and in total. January February March Total Salaries $ Depreciation Insurance Training Total budgeted administrative expense The Operating Budgets: the Budgeted Income Statement and Other Budgets The operating budget culminates in the budgeted income statement. This statement pulls budgeted numbers from the earlier budgets into expected operating income for the year. The sales budget provides the budgeted sales revenue figure at the top of the income statement. Information from the production, purchases, direct labor and overhead budgets are used to calculate Cost of Goods Sold. The marketing and administrative expense budgets provide the total marketing and administrative expense. The company may have other budgets - for example, a research and development budget. If so, the format for that would be modeled on the administrative expense budget. Merchandising and retail firms have simpler operating budgets since they purchase their goods for resale and do not produce them. Check My Work Next The Operating Budgets: Sales, Production and Purchases The sales budget is created first and includes the number of units expected to be sold of each product times the expected price. In this way, total sales revenue, which will feed into the budgeted income statement, is budgeted. Example: Ellsworth Company sells two products, Product A and Product B. Next year, Ellsworth expects to sell 2,500 units of Product A at $5 each and 10,000 of Product B at $4 each. Develop a sales budget for Ellsworth Company. Product A Product B Total Units 2,500 10,000 12,500 X Price x $5 x $4 x $4.20 Sales Revenue $12,500 $40,000 $52,500 The average price shown under the Total column is The next budget to be developed is the production budget. This budget is based on The production budget requires the budgeted unit sales, the desired ending inventory units, and the beginning inventory units. Suppose a company expected monthly sales in the first quarter of 10,000, 12,000, and 13,000 units. Expected April sales are 13,500. The company policy is to have 10% of the next month's sales in ending inventory; it started the quarter with 1,600 units in inventory. The quarter's production budget would be the following: January February March Total Sales + Desired ending inventory Total units needed - Beginning inventory Units to be produced The desired ending inventory for the total column for the first quarter is equal The desired ending inventory for February is equal to to How many production budgets are prepared? The direct materials purchases budgets can be prepared after the production budgets are complete. There are as many direct materials purchases budgets as there are The purchases budget requires the budgeted production in units, the desired ending inventory of direct materials in units, and the beginning inventory in units. Suppose a company expected monthly production in the first quarter of 9,600 units, 12,100 units, and 13,050 units. Each unit takes 2 pounds of Material A and 3 pounds of Material B, Company policy is that sufficient raw materials should be in ending inventory to satisfy 20% of the next month's production needs. Beginning inventory for each material satisfied that requirement (3,840 pounds of Material A and 5,760 pounds of Material B). The direct materials purchases budgets for January and February are as follows: Purchases Budget for Material A: January February March Budgeted units produced x DM per unit produced DM needed for production + Desired ending inventory Total units needed - Beginning inventory Units to be purchased Purchases Budget for Material B: January February March Budgeted units produced x DM per unit produced DM needed for production + Desired ending inventory Total units needed - Beginning inventory Units to be purchased The desired ending inventory for Material B for February is equal to The beginning inventory for January is equal to We cannot complete a direct materials purchases budget for March because you are Hint on the purchases budget: This one was very easy to fill in because all row headings were provided. No real thought needed. However, if preparing a purchases budget on your own, be aware that students often forget to include the line that multiplies the units produced by the direct materials per unit. Remember - we're dealing with units of direct materials here not units of final product