Video one

00:00 hello and welcome to the session in which we would look at the master budget the master

budget is an important topic whether you are taking managerial accounting cost accounting cma

exam or the cpa exam wec section you need to know the various components such as the sales

the sales budget the production budget direct material labor overhead cost of goods sold selling

and administrative which are all called the operating budget you need to know about the capital

expenditure budget the cash budget the budgeted net income

00:32 and the budgeted balance sheet so whether you are an accounting student or a cpa

candidate i strongly suggest you will take a look at my website foreheadlectures.com especially

if you are a cpa candidate or cma candidate i don't replace your review course you keep those

what i can do is provide you alternative explanation which might help you understand the

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you can take advantage of your review course which in turn help

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01:31 please check them out connect with me on linkedin if you haven't done so and review

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connect with me on instagram facebook twitter and reddit so let's take a look go through an

overview and for this session i'm going to warn you there's going to be a lot of numbers that

that's going to be thrown around so if you don't have access to the material to the numbers what i

suggest you do for example take a

02:02 picture on your phone take a picture of the budget numbers that i am working with this

way you could refer to them or write the numbers down because i'm going to be referring to

numbers from other screens so that's it will be easier for you rather than pausing and going back

which is you could you could do that as well but if it's easier for you if you have this information

somehow in front of you so let's go real quick we we covered this an operating budget is this is

the operating budget which we're gonna

02:28 prepare one sales cost of sales uh selling an administrative that's gonna feed into the cash

budget the capital expenditure represent how much we are going to buy in purchase and property

plant and equipment the financial budget include the cash budget which is everything feeds into

the cash budget then the cash budget feeds into the income statement and the balance sheet and

we have obviously we have to prepare the end in cash which will feed as i said in the balance

sheet so the best way to illustrate this

02:56 concept is to work an example and as i said the example will be comprehensive we'll

have a lot of numbers starting with the completed balance sheet so we are seeing is this we have
a balance sheet as of march 2 31st 2026 and now we're gonna complete a balance sheet for the

next three month which is a budgeted balance sheet but to come up with the budgeted balance

sheet we're going to have to complete many schedules which we're going to be learning to do but

you have to understand that we are starting

03:25 with this much cash 16 400 this much account receivable this much inventory this much

prepaid so all these numbers sorry i have to write them i have to spell them out because i do have

some blind viewers so i do apologize cash is 16 400 account receivable 16 000 merchandise

inventory 48 000 prepaid 1800 i do apologize if i don't you know mention all the numbers uh but

that's the reason i mentioned them although you see them on your screen but some of your

classmates again i have two or three blind individuals over the years they

04:00 they get you know they ask me to to to to please say the numbers so that's why i say them

equipment and expenditure which is property plant and equipment 32 000 less accumulated

depreciation of 12 800 we have accounts payable of 16 800 salaries and commission payable of 4

250.

04:21 this is common stock of 20 000 and the beginning retained earnings 60 350. so those are

the figures that that's given to us at the beginning of the period now when we start a budget you

have to understand there's there's an order what we do and what drives a company is sales is the

revenue so guess what sales it's gonna drive everything else so we're going to start with sales

now how do we estimate sales so how do companies estimate sales there are many ways that

they can estimate sales they can ask their sales people to make
04:50 a projection they can study the market they can hire a consultant it doesn't matter we're

not concerned with that here the numbers will be given to us but the sales budget will drive

everything so the forecast for the sales revenue is the cornerstone of the master budget and we're

dealing with this company greg's games their sales in march were 40 000 and by the way march

is already was factored okay but we need this number to project other numbers so the sales in

march was 40 000 the sales manager project the following

05:20 monthly sales here we go april 50 000 may 80 000 june 60 000 july 50 000 and august 40

000. those are projected sales okay so the sales budget is prepared based on 60 of our sales is

cash and 40 on account so simply put when we make a sale for a particular month the customers

usually pay 60 in cash and remaining is 40 on account which will which we collect the following

month heaven said so it means this 40 000 here in march that we did in march 60 of it was

collected in march what does that mean it means 40 percent of it

06:01 was outstanding as of march which is it's part of their account receivable and i believe if

my math is right it's 16 000 and you can see here that 16 000 is on the balance sheet of the

account receivable so this is how the 16 000 came from it's based on 40k sales in march which is

we receive 60 and remaining is 40.

06:23 and here's what we have to do now basically we're going to look at these figures and

we're going to say april and we're preparing a four month ended july 31st 2026 so we're

preparing the budget for four months so august is not included but we'll need august we need the
projected month of august you're going to see why we have why we need this number so in april

50 000 in total 60 cash twenty percent sales on account we'll do the same thing for may which is

eighty thousand in total sixty

06:54 percent of eighty thousand is cash and forty percent is sales on account june the same

thing 60 000 in total in july the same thing 50 50 000 in total 60 in cash 20 000 on account now

then we total all the cash and we total all the cash is 144 000. this is the cash sales simply put

we're going to be preparing a cash receipt schedule and we're going to need this figure in sales on

account it's going to be in total 96 000.

07:27 this is this is the total but we're going to have to compute the account receivable at the

end of the period now what is the account receivable remember the last month part of it will be

this this july jul 60 of july will be cash and 40 of july will be on account what does that mean it

means we're gonna end up with an account receivable i just i just want to show you this now

because you're going to see where this number coming from 40 of 50 000 is 20 000.

07:59 so you already find out what our account receivable we projected what our account

receivable is going to be 20 000. okay this is the sales budget again you're going to see this

several times several times because we need these these figures later on because we need total

sales for the period 240 000 this is going to feed into the income statement this is going to feed

into cash and the account receivable that's going to be needed on the balance sheet so that's why

you're going to see this this schedule again and again now once
08:28 we after we compute the sales budget we have to compute what is our cost of sales and

that's going to include inventory and purchases to figure out your cost of goods sold here we are

not manufacturing anything if we were manufacturing simply put a fewer manufacturing items

simply put we have to prepare a direct material budget a direct labor budget and manufacture an

overhead budget now i do have an example for preparing those type of budgets on my website

for heartlectures.

08:58 com but in this example i'm going to be considering we're selling finished products so

we're not manufacturing anything okay so remember the cost of goods sold computation we have

to know this relationship beginning inventory plus purchases minus ending inventory gives us

cost of goods sold you have to know this formula by heart okay beginning inventory what you

started with plus what you purchased and by the way we call those two we call those two

available for sale we call those two goods available for sale

09:31 goods available for sale and from those goods we will deduct what we have left and this

is how we compute our ending inventory now if we want to find out what is our purchases all we

have to do is rearrange this formula and we know that purchases to find our purchases will take

cost of goods sold plus the desired ending inventory minus beginning inventory oh what we did

is hopefully you know we just rearranged the formula we kept purchases on this side and we

moved ending inventory which became a plus ending inventory minus beginning

10:02 inventory just what we did is just rearrange the formula move those two to the to the

other side of the equation now let's take a look at additional information um budgeted cost of
goods sold average 70 of sales the company will know this will know that for every dollar in

sales approximately 70 percent is cost of goods sold that's that that the the company will have

this data and if it's a new company they will have to basically uh come up with this figure

minimum ending inventory so they they have to have ending inventory for every

10:36 month should equal to 20 000 plus 80 percent of next month cost of goods sold it seems

they want to have inventory on hand and that's the number that they want 20 thousand plus

minimum of twenty thousand plus they want to have twenty eighty percent ready for next month

cost of goods sold what does that mean let's take a look at how do we interpret these numbers it

means for the month of april now we are looking for the month of april sales let me just get the

uh sales budget if we look at the sales budget

11:06 sales for april is 50 000. remember 70 of this is cost of goods sold so 70 of 50 000 is 35

000 which is cost of goods sold in addition to that so this is cost of goods sold now we have to

compute the ending inventory the ending inventory remember it's 20 000 plus 80 percent of the

cost of goods sold for next month so how do we compute next month well next month is eighty

eighty thousand we're gonna have to compute eighty thousand times eighty percent and simply

put eighty thousand so april it's going to

11:44 be twenty thousand plus eighty thousand sorry eighty thousand of the cost of goods sold

so first we have to take eighty thousand eighty thousand times seventy percent and that's going to

give us cost of goods sold 56 000 then multiply this 56 000 by 80 which will give us which will
give us this this figure only should be 44 800 then we add the 20 000 minimum that we want to

we'll come up with 64 800.

12:15 this is how we came up with ending inventory so cost of goods sold plus ending

inventory minus beginning inventory which is the beginning inventory is given to you on the

balance sheet 48 000 will give us the budgeted purchases so this is how much we have to

purchase for the month of april now for the purchases we have to find out how much do we have

to pay in cash and how much are we going to pay on account so we have to find out how much is

cash and how much is on account but this is the total purchases made the same thing what we do

12:48 for the month of may let me erase this the month of may first we'll take may sales times

70 so may sales time which is 80 000 times 70 will give us cost of goods sold then we have to

compute our purchases for that month well to compute our purchases we have to do we have to

find out what what is our desired ending inventory and the desired ending inventory is computed

as 20 000 plus 80 percent of next month cost of goods sold what's next month cost of goods sold

we have to look at sales sales is 60 000 we're going to take

13:28 sales multiplied by 70 percent i believe that's 42 000 and it's eighty percent of the cost of

goods sold so forty two thousand times eighty percent plus twenty thousand that must be twenty

three thousand is that correct thirty three thirty three thousand six hundred because if we take 33

600 plus 20 000 will give us 53 000 which is which is the desired ending inventory then we'll

have total merchandise inventory required less the beginning what is how do we come up with

how do we come up with the with the

14:03 beginning the beginning is last month ending 64 800. then we find out this is what should

be our budgeted purchases for the month of may then we repeat this process for june we repeat

this process for july now the only thing you want to be aware of this is what throw students off

when you are computing the total when you are computing the total for the period well you add

up all of your cost of goods sold your ending inventory at desired ending inventory for july will

be your desired ending inventory for the period

14:36 okay now your beginning inventory when you're computing your beginning inventory

your beginning inventory will be the beginning inventory of the period so notice here 48 000 48

000 was the beginning inventory of the period so at the end of the period when you are doing the

computation for the whole period you will use the beginning inventory of the period so please

make sure you are aware of this so two figures throw students off the ending inventory will be

the last month ending inventory in the beginning inventory is will be

15:04 the beginning inventory of the period and now we have all these purchases you know

now we need to help we find out how much we have to purchase for each month simply put

when we look at the cash payment budget here's our what our purchases would look like we pay

50 this month and we pay 50 the next month so it's going to be 50 cash 50 on account because i

kept saying but this is going to be the rate so this is the and we're going to see this uh inventory

purchases and cost of goods sold budget several times

15:38 okay the next thing we're going to complete is selling administrative uh selling an

administrative expense budget okay the next budget is to estimate the selling and administrative

expenses needed to meet the projected sales because you're going to have to incur expenditure to

operate your business well the monthly payroll for greg gregg's game salaries is 2500 plus sales

commission so it's part of it fixed cost 5000 2500 plus fifteen percent of sales this is basically a

mixed cost with both a fixed

16:11 and a variable component and hopefully you all know what a mixed cost is other monthly

expenses will be as follow they have a fixed cost of rent two thousand they have depreciation

expense per month equal to 500 insurance expense also a fixed cost of 200 and they have

miscellaneous expense which is a variable of five percent of sales so notice they have two

variable sales commission and miscellaneous expense now we're ready to prepare the selling and

administrative budget simply put we're going to take it month

16:41 by month and once you know one month you know the rest um let's look at the sales

budget first the sales budget for the month of april is 50 thousand therefore the sales commission

is fifty thousand times fifteen percent will give us seven thousand five hundred then we have a

miscellaneous expense of five percent of sales fifty thousand times five percent will give us two

thousand five hundred so those are the variable expenses as far as the selling and administrative

budget then we list the fixed expenses we have

17:07 salaries of 2500 rent expense of 2000 depreciation expense of 500 an insurance expense

of 200 and notice those those are fixed for the next four month april may june july notice they
have the same number now for the variable expenses they're going to vary from month to month

for example the commission for may will be different will be 12 000 based on 80 000 sales and

miscellaneous expense will be five percent of eighty thousand and for june and july sales for june

was sixty thousand sales for july was fifty thousand okay

17:39 then we add up the total for the variable expenses and the miscellaneous expenses which

is 36 000 for the commission expense and 12 000 for the miscellaneous the salaries expense in

total for the period 10 000. rent expense is 8 000 depreciation 2000 and insurance expense 2000.

now all these figures they're going to feed well not all of their feet they're all going to feed into

the income statement and the depreciation would also feed into the accumulated depreciation

expense on the balance sheet but this is

18:10 the selling and administrative but i just want to show you that we're going to see these

figures at the end when everything fits in the financial statement the income statement and the

balance sheet now let's take a look at our cash receipts now everything will feed under the cash

receipts and cash payment the cash budget starting at our cash receipts from customers okay

april's budget when we do each month it's going to be for when we do april it's going to be the

cash collection consists of april cash sales

18:37 remember 60 of that month plus it's going to be the collection from march sales which is

40 of the prior month okay and the process is repeated for all four months for april 60 of sales is

30 000. in the prior month you remember we had 16 000 as an account receivable on the balance

sheet well we're going to receive it in april so the total cash receipts is 46 000 which we are
going to see this number again in the cash receipts and cash payment budget for may we'll do the

same thing 60 of the current sales

19:11 of cash sales plus the 20 000 that we did not collect from the prior month because the

prior month was fifty thousand thirty thousand was collected in april and twenty thousand which

is sixty percent was collected in april which is thirty thousand and forty thousand forty percent

was collected in may which is twenty thousand so total is fifty thousand so this is why this 30

000 in april plus 20 000 in may is the total april sales same thing with may 48 000 in may some

of it will be in may and 32 000 will be collected in july so

19:49 on and so forth the total cash receipts will be 144 000. the total the credit sales receipts

after one month which is after the 40 percent is 92 000. total cash receipts for the four month is

236 000 again we're going to see this number again those are our cash receipts this is the good

stuff okay now we're going to look at our cash payment the cash payment consists of 50 of the

march purchases and 50 will be paid in may so every time we make a purchase we pay

immediately 50 in cash and we'll have an account

20:24 receivable for the following month so simply put if we look at our budgeted cash

payment um we're going to pay 50 we're going to pay 50 from march last month purchases 50

from march whatever we purchase in march and 50 percent will be for april whatever our total

purchases was from the cost of goods sold inventory then the same thing will happen in may you

know we're going to have well let's take a look at maybe we need to take a look at this so let me

go back here so simply put if you remember here we

20:58 said 51 800 was the number in april 50 50. 50 will be collected in april and 50 will be

collected in i'm sorry not collected paid in april and 50 will be collected in may okay that's what

it makes it what that's what makes this number that's what makes this number twenty five

thousand nine hundred plus twenty five thousand nine hundred now where did the sixteen

thousand eight sixteen thousand eight hundred came from this if you look at the balance sheet

should have an accounts payable of this amount which is you're going to

21:32 pay in april you have it as of march 31st you paid in april same thing will happen in may

22 000 and the other 22 000 will be paid in june same thing in july same thing for june 18 000

will be paid in june and 18 200 will be paid in july so the total cash payment for everything this

month in the ep from the prior month the total cash payment for purchases is sixty four thousand

five hundred again we're going to see this in the cash uh cash receipts and cash payment schedule

which is the cash schedule schedule of cash payment for selling an

22:09 administrative and this is what it looks like variable expenses they're telling us we pay 50

000 this month and we pay 50 000 of the commission expense this month and obviously the 50

000 in the following month same thing with um with the variable expenses 50 per i'm sorry 50

percent of last month commission then 50 of this month commission so we'd pay 50 50

miscellaneous expense it seems we paid the whole thing all at once in the month incurred but

variable expenses for the commission we pay them 50 immediately and we pay
22:41 them 50 the following month fixed expenses same thing we're going to pay 50 this month

so we have salaries expense of 2500 we'll pay april 1250 we'll pay may 1250 okay i'm sorry 1250

and 1250 uh rent expense will be paid up the full will be paid during the month and by the way

here it should be yes yeah rent rent expense is 2 000 total fixed payment 4 500 total variable

9250 the total payment for selling an administrative again this is going to go into the cash budget

is 13 hundred and fifty and we'll do the same thing for each

23:25 month same thing for each month okay and by the way the fifty percent of july in

commission to be paid in august is five thousand since we're going to have an accrual of five

thousand you because uh fifty percent of the sales commission it's going to be ten thousand so

we're gonna pay five thousand and we're gonna accrue 5000 remaining this is the cash budget

okay first of all we have beginning cash april this is coming from the balance sheet then we have

cash receipts from the cash receipt schedule 46 000

23:57 for the month of april we already did this this is from this figure here so total cash receipt

for april we have cash available 62 400 and also for april we're going to have a capital

expenditure so we're going to buy a new asset this is a new information we're going to pay for it

cash so that's negative 3 000.

24:16 purchase of merchandise inventory forty two thousand seven hundred this is coming from

the cash payment for purchases total forty two thousand forty two thousand seven hundred

selling an administrative thirteen thousand seven fifty we saw this on the previous slide so total

cash payment is 59 450. the ending cash balance is 2950.

24:38 well the company wants to have at least 10 000 at least 10 000 okay what they have to do

if they are short they're gonna borrow to maintain this minimum fund balance and they're gonna

borrow in the increment of a thousand they're gonna pay 12 percent rate and when they pay when

they have extra cash they're going to make installment payment of a thousand so so the minimum

cash desired should be ten thousand okay so we are short we have a deficiency of seven thousand

fifty okay so we're gonna borrow an

25:10 increment of a thousand we cannot borrow seven thousand will be less than 10 000

therefore we borrow 8 000. so we're going to borrow 8 000 8 000 plus the excess cash of 2 950

it's going to keep us with cash 10 950. so this is the cash for april now this 10 550 of april will be

will be the beginning cash for may then in may we collected 68 000 from the cash receipt total

cash available 78 950 no capital expenditure zero purchase of merchandise inventory 48 300

coming from the cash payment then selling an administrative expenses

25:49 coming from the prior slide now we have interest expense of 80 now what are the eighty

dollars coming from we have eighty thousand i'm sorry eight thousand and borrowing times

point one two time point one two is the twelve percent times one divided by twelve and this

should give us this should give us eighty 80 so we have interest expense of 80 total cash

payments 68 66 630 our ending cash is 12 320.

26:21 we're good we have access cash because the minimum is ten thousand we have access

cash of two thousand three hundred and twenty we pay per month if we have any debt a thousand
so we're going to pay a thousand as as a result we're gonna end up with eleven thousand three

hundred and twenty in cash again this cash amount will be the beginning of june and the process

repeats itself now we add the cash receipts then we deduct the cash payment computing the

interest then we have 10 650 uh projected cash we're gonna make a

26:54 thousand dollar we're gonna make a thousand dollar payment uh projected because we

have ending cash balance twenty thousand six fifty we have access of ten thousand six fifty so

we're gonna make a thousand dollar payment and our ending cash will be 19650 and the process

repeats itself until we get to the ending balance of cash of 24 440 and this number will go on this

is going to be our ending balance balance sheet account for cash twenty four thousand four forty

so for july will follow the same process you could review the figures

27:29 now now we're ready actually to complete the projected income statement the projected

income statement it's going to show sales and where do sales coming from well total sales total

budgeted sales 240 000 sales cost of goods sold 168 from the inventory purchases and costs of

goods sold that's going to give us a gross profit of 72 000 then we have selling an admin

administrative commission miscellaneous salaries rent and depreciation and insurance that's

going to be uh that's kind of coming from the selling and

28:02 administrative schedule total of sixty eight thousand eight hundred so if we take gross

profit minus total selling and administrative so this sixty eight thousand eight hundred let me go

back and show you where it's coming from it's coming from the selling in administrative budget

sixty eight thousand sixty eight thousand eight hundred so then we have interest expense of 210
interest expenses coming from the cash budget because we incurred interest expense you

remember we were sure the first month and we had to

28:37 accrue we had to pay interest so total interest for the 4 month was 210 now this is the

income statement so we're done with the budgeted income statement now we need to prepare the

budgeted balance sheet starting with cash i told you the ending cash is 24 440 and i'm sure you

remember account receivable was 20 000.

28:59 you remember the last month uh the last month sales the last month sales and 20 40 of it

will be on account will be collected in august and that's the 20 000. the merchandise inventory

also we figure out the merchandise inventory balance forty two thousand four hundred prepaid

was one thousand eight hundred and we're going to deduct 800 out of it which should give us a

balance of one thousand just to just to know where this number coming from the 800 this is

prepaid insurance and we incur 800 of insurance 200 per month so you can go back to the uh

selling an

29:34 administrative 200 not 800 200 per month 200 times 4 4 equal to 800 and this is how

much we incur in prepaid insurance how much we consumed that's why it went down to a

thousand this is our current assets property plant and equipment we started with 32 we are giving

that we purchase an additional three thousand accumulated depreciation the beginning balance

was twelve thousand eight hundred and five hundred per month that's adding two thousand

fourteen thousand eight hundred we have total asset of one oh eight one
30:06 hundred eight thousand and forty dollars accounts payable is fifty percent of the last

month budget actually it's coming from the cash cash payment sales and commission again fifty

percent of them will be paid the following month which is five thousand and we still have a loan

of five thousand this is coming from the cash budget a loan of five thousand this is our total

liabilities we have no long-term liabilities we did not issue any common stock the beginning

retained earning was sixty thousand three fifty we

30:36 we are projecting a profit of two thousand nine hundred and ninety therefore ending

retained earnings sixty three thousand three forty total stockholders equity eighty three thousand

three forty plus liabilities of twenty four thousand seven hundred will equal two total assets of

108 one hundred eight thousand and forty dollars which is total assets equal liabilities plus

owner's equity this is basically the budgeted balance sheet at the end of this recording i would

like to remind you that if you're interested in uh working

31:08 extra exercises or working practices you can go to forehead lectures.com i do have this

chat i do have this lesson in my managerial accounting course again if you're if your co if your

school or if your textbook is teaching you about direct labor direct material how to find the

budget for that i do have those examples on my website you can take a look at them at the end of

the day i'm gonna ask you to study hard stay safe invest in your career invest in yourself you are

making a huge investment in your

31:38 life it will pay off later

Video two
00:01 hello my favorite managerial accounting students are you ready for master budgeting in

chapter 8 I'm hoping you already read the chapter let's get into it so master budgeting is the

process that we use to create budgets in our organization first we want to understand what we're

doing and why so basic idea a budget is basically a quantitative a numeric plan for acquiring and

using financial and other resources for the forthcoming time periods so of course when we talk

about budgeting we're projecting forward we're using past

00:38 information to make financial plans going forward so here here's a mind-blower for you

the act of preparing a budget is called budgeting mm-hmm yep the use of budgets to control an

organization's activity activities is known as budgetary control I do want to emphasize this

concept of budgetary control and that I see a lot of businesses and even individuals that create a

budget for themselves they set a plan but they don't then follow up they don't check to see how

they've done in terms of meeting that budget and

01:14 quite honestly that's the most important part making the budget it's a great idea it's a good

exercise to get your brain around what you need to do but the follow-up aspect the budgetary

control is really the critical part think of yourself personally do you set a budget do you know

how much money you can spend each month then do you follow up to see how you did in terms

of your budget that's probably the most important aspect and what you'll see is here in chapter 8

we talked about budgets and

01:45 then as we move into chapters 9 10 and mostly nine and ten we'll get into further details

of budgetary control so we talked about the budgeting process we've got planning and
controlling so the planning side is obviously developing the objectives preparing the various

budgets to achieve those objectives so we're going to start with a point that we want to achieve a

certain amount of sales dollars and then we're going to create a plan to go with it the control side

of it is the steps taken by management to increase the

02:17 likelihood that those objectives that we laid out while planning will actually be attained

so that we're actually going to achieve those goals so what can we do during the process to make

it more likely so we have to keep checking in on our numbers see how we're doing and make

adjustments as we go to make sure that we meet our budget that's the control side of it so

advantages of budgeting it starts with defining goals and objectives and that's always a healthy

thing to do which forces us to think

02:48 about and plan for the future helps us allocate resources so if you say that you want to

achieve a million dollars in sales next year but this year you only sold 200,000 well that's a big

jump to go from 200 thousand dollars to a million dollars so we need to allocate resources do we

have enough sales people do we have enough product do we have enough capacity to actually

ship or make that amount of product so we need to really think about our resources so this

budgeting process will help us allocate our resources and uncover any potential

03:24 bottlenecks it should help us better coordinate our activities throughout the organization

so we're all on the same page of achieving that goal and also help us communicate those plans

throughout the organization so we can have a plan of we want to achieve a million dollars in

sales but to individuals and their various different departments that might mean different things
so the budget is a way of communicating that and laying it out numerically for people throughout

the organization to see when we refer to

03:56 responsibility accounting that's the idea that managers should only be held responsible for

those things that they can actually control to a significant extent so responsibility accounting is

going to allow the organization to react quickly to deviations from their plans and learn from

feedback what does that mean what does that have to do with budgeting well the idea in the

budgeting process is that if we have any kind of deviation or variation from our budget we need

to take a look at it we need to ask

04:27 questions figure out what went wrong and correct that and learn from that feedback when

we talk about responsibility accounting it is essentially the idea of figuring out well Who am I

going to blame who is responsible for this blame has such a negative connotation but it doesn't

have to be in a negative way but who is responsible for this deviation from the budget from the

plan and we need to find out what went wrong maybe there's a really good reason that we didn't

adhere to the budget in a given area or maybe we just need to

05:02 tighten up controls a little bit so responsibility accounting can be used in a positive way

to fix problems without necessarily having the negative connotation of blaming somebody for

doing it wrong though people do need to be held accountable so as we start budgeting we need to

choose our budget period so oftentimes when we lay out a budget we do it for a one-year period

often breaking it into quarters or even months and then the concept of continuous budgeting one

that I like a lot is that we have a rolling budget so

05:38 we do have a one-year budget that rolls forward month to month or quarter to quarter so

as we approach the end of 2019 we're not running out of budgeted months as we finish each

month or each quarter we would add another month or quarter onto the end so as we finish one

month we budget one month further in the future as we finished one quarter we budget one

month further in the quarter so we don't get to December 2019 and say oh my gosh we need to

do the 2020 budget I have no idea what's going to happen and it's

06:11 really only a few days or a month away so I like the continuous budget that's a healthy

thing for an organization to do as long as they're genuinely examining that budget each month

not just rolling forward same as last month same as last month the idea of a self-imposed budget

is that we're going to budget from the bottom up rather than the top down a lot of times in

budgeting top management says here's what we're going to do and they tell every below them

this is what's happening and

06:43 that can be very effective and it can be done very well but sometimes it doesn't get the

buy-in of the people below them so the idea with a self-imposed or a participative budget is that

is prepared with the full cooperation and participation of managers at all levels so these

managers or supervisors are going to say here's what we think we're capable of doing and then

the budget will be based on that pushing information up to top management so advantages of

doing a self-imposed or participative budget would include

07:18 individuals feeling like they're members of the team well here we get into warm fuzzies

in accounting which you know I'm not a big fan of but the idea being that we're gonna get more

buy-in from people throughout the organization if they have input into the budgeting process

beyond that just from feeling like they're members of the team a lot of times the people on the

front line the managers that are hands on are gonna have more accurate estimates than people

sitting in a remote office and who don't

07:49 necessarily have a connection with that day-to-day work so sometimes it's going to be

more accurate thirdly we're hoping that motivation is higher when individuals participate in

setting their own goals they might feel more of a connection and more motivation to actually

achieve those goals rather than when those goals are imposed on them from the top down and

then finally a manager who's not able to meet a budget and Pro impose from above can just say

well it was unrealistic they didn't have

08:18 a clue what they were talking about when they set those numbers when we talk about a

self-imposed budget that excuse is eliminated because the budget numbers should be achievable

which leads to the opposite problem which is called budgetary slack a self-imposed budget needs

to be reviewed by higher levels of management to prevent budgetary slack which is the idea that

if we let lower level workers lower-level managers set their own goals they might set the bar too

low so that it's easily achievable they really

08:53 setting the budget we should challenge ourselves a a bit it should be realistic but it should

be a bit of a challenge but in self-imposed budgets there is a tendency to set the bar too low
making it easily achievable so workers can say look we did it we achieve the budget so that's

where management needs to review for budgetary slack human factors and budgeting so in terms

of our budget programme we need to consider these three factors one top management must be

enthusiastic and committed to the budget process well they don't have to be but

09:29 it's recommended that management be committed to the budget process and sure a little

enthusiasm would help but they need to set realistic yet challenging numbers they need to you

know raise the bar a little bit to challenge the organisation to be its best number two top

management must not use the budget to pressure employees or blame them when something goes

wrong well here we are back at the word blame we just talked about responsibility accounting

and I'm all about holding people responsible for

10:03 the things that they need to improve on I don't think there's anything wrong with that

unfortunately the word blame has a very negative connotation we don't have to punish people we

don't have to shame them but we should pressure them to do their best the budget should create a

little bit of positive pressure positive motivation to get things done as financially efficiently as

possible so I don't love the word blame but we do need to apply responsibility accounting here's

where I think your textbook is a

10:36 little bit too idealistic and a warm-and-fuzzy in business we do need pressure we can

keep it positive though number three highly achievable budget targets are usually preferred when

managers are rewarded based on meeting budget targets well yeah that's nice that's where we

talked about budgetary slack so if we're gonna reward our managers based on meeting their
budget targets those targets need to be a little bit challenging we want them to be motivated but

not completely discouraged that it's unachievable

11:06 so we need to find that happy middle ground where we're feeling challenged but not

impossible so this slide here you might want to refer back to this slide 8-12 this does essentially

the roadmap of the master budgeting process that we're going to be doing I do want to note that it

starts up here with the sales budget so that's an important thing we're gonna start by setting a

sales goal and then everything else is gonna fall in place after that so we do a sales budget which

will tie into our sell in an admin

11:37 budget the sales budgets gonna push a production budget which oddly ends in an ending

inventory budget kind of a strange thing to budget for but you'll see why we do that in a moment

in the production budget we have our direct materials direct labor in mow budgets and then all of

that goes into a cash budget the cash budget has to be done before we do our budgeted financials

our budgeted income statement and our budgeted balance sheet so I'm gonna try to get us

through this as efficiently as possible and you guys can

12:09 refer back to it as you need help with your chapter 8 work in terms of the big picture

we're gonna be doing these 10 schedules and here they give you a bunch of words on the screen

to read and I'll let you read that on your own time if you're interested so a master budget is gonna

be based on various estimates and assumptions so as we do budgeting remember in managerial

accounting we're not about precision as much as we are about relevance and timeliness so

absolutely this is going to be based on

12:43 estimates and assumptions and some of these assumptions we're going to have to make in

terms of payment patterns and collection patterns and all of that and they may not always be true

but they are good enough for budgeting and managerial accounting so the first thing we need to

figure out in terms of starting our sales budget is was what is our budgeted unit in unit sales and

what is the selling price per unit and then finally what percentage of accounts receivable will be

collected in the current and subsequent periods so in terms of how

13:14 much will we collect now how much will we collect later so first a little snippet of Excel

here as we go through our budgets in this chapter I want you to picture Excel picture how you

can use Excel or another spreadsheet software to help you in the budgeting process in the real

world we do use Excel quite a lot in accounting and particularly for the budgeting function some

larger companies have software's specific to help them with budgeting but Microsoft Excel is a

great place to start do you keep in mind that you guys

13:49 will be doing a budget spreadsheet assignment in a in Excel related to this chapter so our

sales budget we're gonna take a look at royal company and they're preparing their budgets for the

quarter ending June 30th so that quarter would be April May and June and they've laid out their

budgeted sales for the next five months twenty thousand fifty thousand thirty thousand and then

they go into July in August twenty five thousand and fifteen thousand turns out we will actually

need this information so we do need those projections and the

14:22 selling price is ten dollars per unit so we start real simple we just lay it out April May

June and then on the far column we put the quarter that sums our budgeted sales and units so

April is twenty thousand times ten dollars is two hundred thousand May is fifty thousand times

ten dollars and so on I didn't want you to note over here in the quarter column that the budgeted

sales in units is a sum so we're just summing right across but notice that the selling price per unit

is not a sum is still just ten dollars mathematically we would

14:58 be wrong to sum ten plus ten plus ten and say that we have a hundred thousand units

times thirty dollars that would be blatantly mathematically wrong so as for doing these budgets

and you're picturing doing this in Excel it's important that we realize the quarter column is not

always just a sum of April May and June sometimes it's a single point which is ten dollars per

unit in this case so big picture we're looking at a million dollars of sales for the quarter and we've

broken it out a month

15:35 and then we need to consider our collection pattern so 70% is collected in the month of

sale and 30% is collected in the month following the sale and then they tell us that our March

31st accounts receivable balance of 30,000 will be collected in full and April so what we're

trying to do is understand our cash related to sales so what our cash collection is going to look

like related to sales so in the month of April we start by collecting the leftovers from March so

that's the $30,000 of accounts receivable and then

16:11 from our April sales we collect 70% in the month of which is a hundred and forty

thousand and the other 30% in the month following so 30% times 200,000 the other 60,000 gets
collected in May and then in May we're going to collect 70% of May so 70 percent times

500,000 we click 350,000 of May sales in May and the other 30% of May sales get collected in

June what will be the total cash collections for the quarter can you project that do you remember

what June sales were going to be were you able to come up with one of

17:11 these figures so the total for the quarter is going to be nine hundred forty thousand and

here's how so we already knew one hundred and seventy thousand from April April 410,000

from May and then in June we knew we're gonna collect thirty percent times five hundred

thousand is 150 of the May sales and then we'll collect 70 percent of June which is three hundred

three hundred thousand times seventy percent so two hundred and ten thousand so in June our

total is three hundred sixty thousand and then we add all of

17:48 that up so for the quarter nine hundred and forty thousand what's accounts receivable at

the end of the quarter what's not been collected it's the other 30 percent of June sales right and

they're noting that down here which is really important so the other 30 percent times three

hundred thousand the other ninety thousand has not been collected when will it be collected July

right so accounts receivable at the end of the quarter is ninety thousand and we expect to collect

that in the month of July so

18:24 our next step is to prepare our production budget so the production budget must be

adequate to meet budgeted sales and provide for desired ending inventory so management of

Royal company wants ending inventory to be equal to 20 percent of the following months

budgeted sales in units hmm okay twenty percent of the following months budgeted sales in the
units and we already have four thousand units on hand from March so let's take a look at what

this looks like laid out in a spreadsheet so our budgeted sales and units are twenty

19:02 thousand fifty thousand and thirty thousand as we know so then our desired ending

inventory is gonna be the following month so fifty thousand times twenty percent and our

desired ending inventory for April then is ten thousand so for the month we need a total of

twenty thousand for sales and ten thousand for desired ending inventory means we need thirty

thousand units but we already have fourth unhand so that means we need to produce 26,000

what's our desire to ending inventory for May so we'll take 30,000

19:46 for June times 20% and that should give us our desire to ending inventory for May so

quick check to you what's the required production for May well let's go back for a second so we

were gonna take 30% sorry 20% times 30,000 that's our desired ending inventory and we'll add

that to 50,000 of total needs and then our beginning inventory we're to subtract our beginning

inventory where do we get beginning inventory it's the ending inventory from April and that will

give us our required production so

20:27 50,000 plus 20% of June equals our total needs subtract our beginning inventory which is

our ending inventory from April and that will tell us our required production were you able to

come up with one of these I hope you got be 46,000 here's what it should look like so 50,000

plus 20% times 30,000 so we're taking 20% of June so that's 6,000 total needs are 56,000 we

subtract 10,000 that we already had an ending inventory so in May we need to produce 46,000

and again for June we do the same thing this time we have to look
21:15 forward to our July sales of 25,000 units so we do need that information from the

beginning of the problem we take 25,000 units times 20% and we get 5,000 so our total needs for

the month or 35,000 we have beginning inventory of 6,000 right that came from the main column

so our total production needs to be 29,000 and I do want to point out in the quarter column look

at these red arrows so budgeted sales for the quarter 100 Yunis so that's a sum of April May and

June but the next row ad desired ending inventory the ending inventory is not a

21:53 sum it's the ending inventory at the end of June it's not a sum it's a balance at a point in

time so it's the ending inventory from June I'm pointing this out because it's important for your

budget spreadsheet assignment total needs that are one hundred and five thousand and then we

subtract our beginning inventory and again our beginning inventory is not a sum of April plus

May plus June it's our beginning inventory from the beginning of the quarter so at April 1st our

beginning inventory was four

22:27 thousand so that gets subtracted here and our required production is one hundred and one

thousand then mathematically this should all work out but we need to be careful that things like

ending and beginning inventories are not sums of three months their points in time those are

balances at a given point in time so next we need to prepare our direct materials budget including

a schedule of expected cash disbursements for purchases of materials that's a lot to think about

we'll go through the details alright so

23:06 at Royal company five pounds of material a required per unit of product and management

wants materials on hand at the end of each month equal to 10% of the following month

productions and 13,000 pounds of material are on hand and material costs 40 cents per pound

okay that's a lot of information let's look at how to lay that out and digest all of that so our

production that we computed from our production budget that's our starting point and then we

know it's 5 pounds per unit so we multiply each of those figures by 5 so

23:47 for April we need 130,000 pounds but then they also told us about the desired ending

venturi they want 10% of the following months production needs so we take the 230,000 pounds

from May we multiply it by 10% so we have desired inventory 23,000 so our total need for April

is 153 we subtract the 13,000 that we already have so we need to purchase 140,000 pounds okay

now let's try it from May so production is 46,000 times five pounds 230,000 but then we also

need to add in our desired ending inventory which will be 10% of the next

24:38 month so 10% times 145,000 is 14,500 so our total needs will be do you have it okay and

then we're gonna subtract our beginning inventory where will we get our beginning inventory

from our ending inventory from April becomes our beginning inventory in May and that should

get us to arrive at materials to be purchased what did you come up with hey I hope here's what it

should look like so the 230 plus 14,500 we've got 240 4500 we subtract the 23,000 that we

should already have on hand and we need to purchase 220 1500 more all right so

25:36 then we need to finish it out for June right so 145 thousand our desired ending inventory

where did we get that they don't show it very well we'd have to figure out July and multiply 10
percent of our July needs so we'd have to be making a computation over to the side on a piece of

paper probably so our total needs are 150 6500 we again subtract our beginning inventory which

came from May and we need to purchase 142,000 and again these arrows are pointing out a

couple important things here some of these rows

26:16 we can just sum them across and that equals two quarters so production we can add it up

and equals 100 and 1000 but materials per unit and pounds we don't add that up we'd get 15 it's

just five still production needs we can add a cross or multiply down and it should work desired

ending inventory though comes just from Jun the ending inventory at the end of June and then

our beginning inventory is again not a some it's our beginning inventory from the beginning of

April so ending and beginning inventories make sure you're

26:53 not adding those but rather taking them from the from the months to the point in time

where they came from originally so we know royal pays 40 cents per pound for its materials and

they tell us one half of a month purchases is paid for in the month of the purchase and the other

half is paid in the month following so if we have an Accounts Payable balance of twelve

thousand of March 31st we're going to need to pay that first so in the month of April we pay off

March accounts payable and then from our April

27:29 purchases we're gonna pay for half of it in April and half of it in the month of May and

we got that by taking the 140,000 pounds times 40 cents equals fifty-six thousand dollars so half

of 56 thousand is 28 thousand that we pay for it April and the other half gets paid for in the

month of May so then also on the month of May well that's a hard question what are the total
cash disbursements for the quarter hmm well also in the month of May we'll have to pay for half

of May and then we'll pay for the other half of

28:06 May in the month of June let's skip ahead here's what it would look like for the quarter so

in the month of May we pay for the other half of June excuse me we pay for the other half of

April then we compute man so it may comes out to eighty eight thousand six hundred we pay for

half of that in the month of May and the other half the other forty four thousand three hundred

gets paid for in June and then for June we figure out we multiply by 40 cents so the total is fifty-

six thousand eight hundred of which we pay for half

28:40 in June and the other half is gonna get paid for in July so the other twenty eight thousand

four hundred becomes our accounts payable balance at the end of the quarter we still owe

another twenty-eight thousand four hundred on the June purchases to be paid in July so next we

need to do our direct labor budget so at Royal each unit requires 0.

29:10 05 hours that's three minutes of direct labor the labor can be unskilled because the

production process is simple and they pay their workers at a rate of ten dollars per hour so this is

going to be based on our production so we take our units of production for each month and then

we multiply it by 0.05 and that tells us how many hours are required so in April we need 1300

hours May 23 hundred and June 1450 and then we have our hourly wage rate $10 per hour and

we get our total direct labor costs for the period what about this though what would
29:53 be the total direct labor cost for the quarter if the company pays time and a half for all

hours worked by employees over two thousand per month so if there anything above two

thousand hours they have to pay overtime at time and a half so let's go back first of all if you're a

manager and you see this production pattern twenty six thousand and April is spikes way up to

forty six thousand and May and then drops back down to twenty nine thousand in June and then

we look at our labor hours required as a manager

30:30 is there anything that you want to do about this I feel like we should be pushing some of

the may production into April so that we're not in overtime in the month of May but that's not

what the question asked that would just be good managerial common-sense to avoid paying

overtime and to keep our employees steadily busy rather than not busy enough and then too busy

in the month of May but what we need to figure out is to the extent that this 2300 labor hours

exceeds 2000 we have to pay time and a half so we've got

31:06 300 hours that are going to incur overtime [Music] are you able to come up with one of

these answers hopefully if that be so the extra 300 hours have to be paid at time and a half so

they've removed those 300 hours and multiplied it by 15 rather than 10 and they come up with

52,000 another way of looking at it is that we already knew fifty thousand five hundred and

you've got 300 hours that on which employees are going to need to be paid an additional five

dollars because it's already included at ten dollars so if I

31:58 take 300 hours times five dollars that's 1,500 more and I could add fifteen hundred two

fifty thousand five hundred and come up with the same 52,000 maybe a little bit faster our next
step is the MOU budget manufacturing overhead budget and at Royal mouths applied to units of

product on the basis of direct labor-hours so our variable mo is $20 per DLH and the fixed mo is

50,000 per month which includes 20,000 of non-cash primarily depreciation right now you may

not care so much about the non-cash part but when we get to the cash budget then

32:40 you will so in terms of our remote budget we take our budgeted direct labor-hours DL h's

and then we're gonna multiply it by the variable mo rate of $20 per hour so we get 26,000 46

thousand and 29,000 and then we take our fixed mo we add that in and we get our total

manufacturing overhead cost by the month and for the quarter total so this next thing they're

doing here you might be wondering why are they doing this and we're gonna come back to this

number we're not going to use it quite yet but

33:18 what they're doing is computing our predetermined overhead rate right because we're

projecting out our move for the quarter and we know our our cost driver direct labor-hours so we

may as well compute it now so we're projecting $251,000 in total move for the quarter we're

going to divide that up by 5050 labor hours and we should come up with a predetermined

overhead rate of forty nine dollars and seventy cents for the moment just stick that away in the

back of your brain and we will pull it out here in a moment so

33:54 from this we can subtract our non-cash items and we get our cash disbursement from

manufacturing overhead so we've got our manufacturing overhead cost that's our cost for that

period but in terms of cash flow we subtract $20,000 for each month and we get these bottom

numbers 56,000 seventy six thousand and fifty nine thousand next we need to do our finished
goods or excuse me our ending finished goods inventory budget so we need to know what we

end up with what's gonna stay on our balance sheet so in

34:30 terms of understanding our production cost per unit we have direct materials five pounds

forty cents so that's two dollars direct labor is 0.05 hours per unit times ten dollars looks like fifty

cents and then our mo is 0.05 hours right because it's based on our direct labor hours and it's at

4970 ah that's that number that's our predetermined overhead rate and that ends up costing two

dollars and 49 cents per unit so our production cost per unit in total is $4.99 to me this 4970 part

I think

35:10 that's one of the hardest parts of doing the entire budgeting process is connecting that

understanding that from your mo budge it and computing your predetermined overhead rate and

knowing to put that in here to compute your production cost per unit I think that's tricky so these

slides are definitely ones worth marking and reviewing so in terms of our budgeted finished

goods inventory we're going to take our ending inventory at units times $4.

35:45 99 and we'll get our ending goods inventory so how many units of ending inventory will

we have 5,000 you have 5,000 units that came from our production budget a while back okay so

we didn't just now come up with that that was from the production budget so 5,000 units times

$4.99 our ending finished goods inventory which will need that on our balance sheet will be

24,000 950 so then we get to our sell in an admin expense budget so lots of info for you here we

divide it into variable and fixed components the variable sell in an admin is 50 cents per unit and

fixed on
36:29 an admin is 70,000 per month and they're letting us know that in terms of our cash flow

that fixed amount includes $10,000 in costs like depreciation that are not cash outflows right

because there's no cash involved in depreciation so let's do our selling and admin expense budget

so in April we've got 20,000 units times 50 cents each and our variable selling an admin expense

should be 10,000 our fixed on and admins and another 70,000 so total in terms of our expense

would be 80,000 but for cash

37:06 flow purposes we subtract 10 and our cash outflow for 7 admin is only 70,000 can you

finish it out for the quarter sure you're quick right it's be 230,000 so for each month we're taking

our budgeted sales times 50 cents to get the variable amount we add in our fixed of 70,000 to get

our total sell it in admin expense and then for cash purposes we subtract 10,000 each month so

the total for the quarter should come out to 230,000 so with all that now we're finally ready to do

our cash budget so

37:50 the cash budget is maybe one of the trickier parts we're going to divide it up into four

basic section some of these sections shorter than the other so first we're gonna start with our cash

receipts and they'll still show all the cash inflows except for cash from financing part two we're

gonna do our cash disbursements so here you're gonna be tying in a lot of the cash outflows from

all these other supporting schedules that you prepared so that'll be all our cash payments except

for those having to do with financing

38:23 repaying the principal and interest on any financing part three is really just a computation

where we're gonna compute our cash excess or deficiency meaning we need to figure out do we

have enough cash do we need to borrow any money and then we'll figure out if we need to

borrow or repay and then part four is our financing section that is going to detail out the

borrowing or repayment and compute any interest if we need to pay interest as well so here's a

ton of additional information for you assume

38:58 the following row maintains a 16% open line of credit for seventy five thousand dollars

okay so what does that mean that means that they have a line of credit at their bank where they

come borrow funds up to seventy five thousand dollars and they have to pay interest of an annual

rate of sixteen percent right it doesn't say annual but unless it says otherwise we assume interest

rates are annual we need to maintain a minimum cash balance of thirty thousand dollars to the so

to the extent that we don't have thirty

39:31 thousand dollars at the end of any given month according to our cash budget then we

need to borrow if we're borrowing we borrow on the first day of the month and we repay on the

last day of the month when we have funds available other info we're gonna pay a cash dividend

of forty nine thousand in the month of April oh yeah and we also purchased some equipment one

hundred and forty three thousand seven hundred in May and forty eight thousand three hundred

in June both paid in cash and we have a beginning cash balance of forty thousand

40:03 all right so let's give this a try that's a lot of information so we have beginning cash of

forty thousand up at the top we add in our cash collection so this comes all the way back to the
beginning we did our budgeted sales and our schedule of expected cash collections so in April

we expect to collect $170,000 so we shuck $210,000 available then we have all these cash

disbursements many of them coming from schedules that we already did so materials $40,000

comes from our schedule of expected cash disbursements so from buying our raw

40:41 materials right direct labor we computed that previously mo from our mo budget selling

an admin former selling an admin expense budget so all of these were from different schedules

that we previously computed in April we didn't buy any equipment so that's zero but it did tell us

that we're gonna pay out of 49 thousand dollar dividend in the month of April so we're gonna

have disbursements of two hundred and twenty eight thousand so that's parts one and two we

need to compute part three so if we have cash

41:14 available of two hundred and ten thousand but disbursements of two hundred and twenty

eight thousand mm sounds like we have a deficiency right so we do our math we have a

deficiency of eighteen thousand but we had a required minimum cash balance of thirty thousand

at the month we can't budget ourselves to be deficient in camp cash or even at zero in cash we

need to have a little cushion in there so we need to have a good cash balance of thirty thousand

so in order to achieve that we're gonna have to borrow forty eight

41:46 thousand dollars on the line of credit and right now we don't do anything with that we're

not going to compute our interest until it's time to repay so we assume we borrow on the first day

of the month and when we're able to we will be paying that back on the last day of the month and

we'll deal with the interest computation then so we go ahead and do the same thing for May
please note that your ending cash balance from April thirty thousand as required becomes your

beginning cash balance for me you again

42:18 you add in your cash collections so you're going back to your budget sales and your

schedule of expect cash collections so we should have four hundred and forty thousand dollars

available and then we have all these cash disbursements so materials direct labor mo and so on

an admin we're from schedules that you already computed and then they told us that we

purchased equipment of one hundred and forty three thousand seven hundred so we got

disbursements of four hundred thousand which should leave us with forty

42:47 thousand dollars remaining so that's not enough to repay the loan but we also don't need

to borrow any money at this time so that's good but we don't have enough to pay back the 48

thousand that we borrowed we need to hold on to all of that so what's the excess or deficiency of

cash available for June can you do that in your head that's pretty hard let's go ahead and take a

look at how to get there the answer is one hundred and thirty thousand five hundred but let's go

ahead and look at that so we took our ending

43:21 balance from a forty thousand and that became our beginning balance for June we add in

our cash collections of three sixty so we have a total available four hundred thousand then again

we've got our items here from the previous schedules so you already computed these first four

items and then it tells you that you bought equipment for forty eight thousand three hundred so

we have disbursements of two hundred sixty nine thousand five hundred so we have an excess

this time four hundred thousand minus two hundred sixty nine thousand
43:55 five hundred we have a hundred and thirty thousand five hundred available in cash how

much do we need to have just thirty thousand so we have plenty of cash available to pay back

what we borrowed the forty eight thousand so we are presumably paying back that forty eight

thousand dollars on the last day of June and with it we have to pay back the interest so with a

line of credit we pay the interest as we go so when we pay it back we pay the interest so we'll

take forty eight thousand times six persons excuse me sixteen percent that's the

44:33 annual rate but we didn't borrow it for a full year we only borrowed it for three well so

we're taking three twelfths of that amount and we come up with 1920 so again principle times

interest rate times time outstanding and we have our interest expense for the quarter that we have

to pay back in cash as well so we're gonna be paying the bank forty nine thousand nine twenty

total and our ending cash should be eighty thousand five eighty and then for the quarter we need

to be careful some of these we can sum across

45:08 others like the beginning balance just comes from the beginning of April it is not a sum

of April plus May plus June your beginning balance for the quarter is your beginning balance at

April first we can add our cash collections across and then our total cash available is forty

thousand plus nine forty equals nine eighty so these ones here these disbursements can all be

added across and then our excess or deficiency will be nine eighty minus eight hundred ninety-

seven five hundred our borrowing is the forty eight thousand a repayment is negative
45:49 forty eight thousand our total financing it next out to nineteen twenty so that's what it

ultimately cost us to have the financing so the interest is what shows up there ultimately and then

our ending cash balance is not a sum across but it's our ending cash balance at the end of June so

not a sum but our balance as of june thirtieth should be eighty thousand five hundred and

mathematically this should all work out so the cash budget i think is the trickiest part our next

job is to do the budgeted income

46:25 statement we can't do the budgeted income statement until we get that interest expense

and we can't do the interest expense until we figure out how much cash financing we need so

that's why we have to do the cash budget first so then we move on we do our budgeted income

statement so we take our sales a million dollars is our sales budget our cogs we're so in a hundred

thousand we multiply that by $4.

46:53 99 remember we computed our unit product cost so our gross margin should be 500 and

1000 our selling an admin expense from our cell and an admin budget is 260,000 and that leaves

us with operating income of two hundred forty-one thousand we subtract our interest expense

that we computed on their cash budget and we get our net income of 239 thousand eighty and

then finally we do our budgeted balance sheet so they need to give us something heating

balances for our balance sheet we've got land of fifty thousand common stock of 150 thousand

retained earnings

47:35 of two hundred forty eight thousand six fifty at April 1st and we already had equipment

on hand of one hundred seventy five thousand all right so a lot of information there let's go to the
balance sheet see where these numbers come from so our cash at the end of June remember we're

doing our budgeted balance sheet for the end of the quarter so our ending cash comes from our

cash budget from the end of June accounts receivable that's the other 30% of our June sales

remember we talked about that way back when we did our budgeted sales

48:08 on schedule of cash collections our raw materials inventory so we still have eleven

thousand five hundred pounds at forty cents a pound from our production budget our finished

goods inventory was the five thousand units at four dollars and ninety nine cents each land

they're telling us we have fifty thousand and then in terms of equipment we take the beginning

balance of one hundred seventy five thousand and then we had two purchases one in May and

one in June so we add that all up and we get three hundred sixty seven thousand so we

48:42 should come up with total assets of six hundred and seventeen thousand 130 which is a

clue that we should also know our total liabilities and stockholders equity should be sixty-six

hundred seventeen thousand one thirty our accounts payable is half of our June purchases so that

came from our schedule of cash payments so twenty eight thousand four hundred they're telling

us our common stock is 150,000 and then you're supposed to compute e retained earnings do you

remember how to compute retained earnings this is a really critical bit

49:15 of knowledge that you should remember from financial accounting but in case you don't

here's your quick refresher you're gonna take your beginning retained earnings balance add your

net income which you needed to do your income statement first so you can compute your net

income up two hundred thirty nine thousand eighty and then you subtract forty nine thousand
dollars of dividends and you get your ending balance of four hundred thirty eight thousand seven

thirty and once you plug that in your about she should balance

49:47 whew that was a lot of steps in the budgeting process I hope you were able to stay with

me through it all um please do refer back to these slides this problem is a great example of how

to get through all the different budget schedules and might be useful for you as you do your

homework and your budget spreadsheet assignment let me know if you guys have any questions

you know where to find me