Master Budget and Flexible Budget Performance Analysis

Master Budget
Flexible Budget and Performance Analysis
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7.1 Master Budget
After studying Master Budget, you should be able to:
 Define budgeting and other terminologies
 Describe the purposes of budgeting
 Identify different types of budget period
 Understand budget sample committee
 Explain the budget management process
 Understand the master budget cycle and its preparation

What is a Budget?
o A budget is a financial plan of the resources needed to carry out tasks and meet
financial goals. It is also the quantitative expression of the goals the organization
wishes to achieve and the cost of attaining these goals.
o Budgeting is the act of preparing a budget.
o Master Budget is a summary of all phases of a company’s plans and goals for the
future.
o Budget committee is responsible for coordinating the preparation of the budget.
o Planning involves developing objectives and preparing various budgets to achieve
the goals.
o Control involves the steps taken by management to ensure that the objectives set
down at the planning stage are attained and to ensure that all parts of the
organization function in a manner consistent with organizational policies.
An effective budgeting system must include both planning and control.

The Purposes of the Budget
• Defining broad objectives and goals;
• Coordinating the activities of the organization;
• Allocating resources;
• Communicating management’s approved plans;
• Uncovering and preparing for potential bottleneck in the
operations before they occur;
• Motivating managers to achieve the desired results; and
• Setting a standard or benchmark for evaluating actual
performance.

Types of Budget Period
• Master budget is usually prepared on a quarterly or an annual basis.
• Capital budget is for major expenditures for equipment or addition of
product line and might cover as long as 5 – 10 years.
• Responsibility budget which are segments of the master budget relating to
the aspect of business that is the responsibility of a particular manager are
often prepared monthly.
• Cash budget may be prepared on a day-to-day or monthly basis.

Sample Budget Committee
Top
Management
Middle
Management
Department
Head A
Department
Head B
Middle
Management
Department
Head C
Department
Head D

The Budget Management Process
1. The top management will inform middle management about upcoming budget
activities.
2. The middle management will then call the attention of the budget committee.
3. A budget committee with representation from the different functional areas is
generally considered an effective body to oversee budget policies, preparation
and administration.
4. The Controller or Chief Finance Officer may be selected to serve as head of the
committee and coordinates the budgeting operation throughout the organization.
5. The budget committee decides how budgets shall be prepared, passes on the
final budget ,and settles disputes in one segment of the business and another
when differences of opinion arise.
6. Before submission of department’s budget, the budget committee will conduct
budget hearing. The middle management will then decide whether to approve or
reject as per resources and time.
7. The committee receives the approved budget report of different areas and
arrange the plan based on the top priority.
8. Upon implementation, the CFO will then distribute financial resources.
9. Department heads must monitor and evaluate every projects.

Master Budget - Sales Budget Schedule
The first step in developing the master budget.
Modern Mountain Enterprise
Sales Budget
For the Year Ending December 31, 20x2
Quarter
1st 2nd 3rd 4th Year
Sales in units 5,000 15,000 20,000 10,000 50,000
Unit sales price 225 225 225 225 225
Total sales revenue 1,125,000 3,375,000 4,500,000 2,250,000 11,250,000

Master Budget - Production Budget Schedule
Shows the number of units of services or goods that
are to be produced during a budget period.
Production Budget
Quarter
Sales in units (Schedule 1) 5,000 15,000 20,000 10,000 50,000
Add: Desired ending inventory finished goods 1,500 2,000 1,000 500 500
Total units required 6,500 17,000 21,000 10,500 50,500
Less: Expected beginning inventory finished
goods 500 1,500 2,000 1,000 500
Units to be produced 6,000 15,500 19,000 9,500 50,000

Master Budget – Direct Materials Budget Schedule
Shows the number of units and the cost of material to be
purchased and used during a budget period.
Direct Materials Budget
Quarter
Raw Materials A - Tent Fabric 1st 2nd 3rd 4th Year
Tents or units to be produced (Schedule 2) 6,000 15,500 19,000 9,500 50,000
Raw Materials per unit yards of fabric 12 12 12 12 12
Raw Materials required for production 72,000 186,000 228,000 114,000 600,000
Add: Desired ending inventory of raw materials 18,600 22,800 11,400 7,200 7,200
Total raw materials required 90,600 208,800 239,400 121,200 607,200
Less: Expected beg. inventory of raw materials 7,200 18,600 22,800 11,400 7,200
Raw materials to be purchased 83,400 190,200 216,600 109,800 600,000
Cost per yard 9 9 9 9 9
Total raw materials purchases 750,600 1,711,800 1,949,400 988,200 5,400,000
Raw Materials B - Tent Poles
Tents to be produced (Schedule 2) 6,000 15,500 19,000 9,500 50,000
Poles kits required per tent 1 1 1 1 1
Tent pole kits to be purchased 6,000 15,500 19,000 9,500 50,000
Cost per tent pole kit 20 20 20 20 20
Total cost of tent pole kit purchases 120,000 310,000 380,000 190,000 1,000,000
Total cost of raw materials purchases 870,600 2,021,800 2,329,400 1,178,200 6,400,000

Master Budget – Direct Labor Budget Schedule
Shows the number of hours and the cost of the direct labor
to be used during the budget period.
Direct Labor Budget
Quarter
Units to be produced (Schedule 2) 6,000 15,500 19,000 9,500 50,000
Direct labor required per unit 0.5 0.5 0.5 0.5 0.5
Total direct labor hours required 3,000 7,750 9,500 4,750 25,000
Direct labor cost per hour 15 15 15 15 15
Total direct labor cost 45,000 116,250 142,500 71,250 375,000
Please Note:
The company is using part-time laborers for seasonal demand and production.
This is the strategy used by the company and direct labor may be adjusted up and down
to meet short term needs. Since employees are on a part-time basis, it will fall under
unit-level cost which is variable cost. But if employees were retained even with low
production, it will fall under facility and general level cost which is fixed cost.

Master Budget - Manufacturing Overhead Budget Schedule
Shows the cost of overhead expected to be incurred in the
production process during the budget period.
Quarter
Unit Level Cost
Units (Schedule 2) 6,000 15,500 19,000 9,500 50,000
Indirect Material 18,000 46,500 57,000 28,500 150,000
Electricity for Machinery 6,000 15,500 19,000 9,500 50,000
Total unit level cost 24,000 62,000 76,000 38,000 200,000
Batch Level Cost
Production Runs 12 31 38 19 100
Setup at $400 per run 4,800 12,400 15,200 7,600 40,000
Purchasing and material handling at $600 per run 7,200 18,600 22,800 11,400 60,000
Quality control and inspection at $500 per run 6,000 15,500 19,000 9,500 50,000
Total batch level cost 18,000 46,500 57,000 28,500 150,000
Product Level Cost
New tent designs 1 1 1 1 4
Design Engineering 1,200 1,200 1,200 1,200 4,800
Total product level cost 1,200 1,200 1,200 1,200 4,800
Facility and general operation level cost
Supervisory salaries 52,500 52,500 52,500 52,500 210,000
Insurance and property taxes 11,300 11,300 11,300 11,300 45,200
Maintenance 47,500 47,500 47,500 47,500 190,000
Utilities 40,000 40,000 40,000 40,000 160,000
Depreciation 110,000 110,000 110,000 110,000 440,000
Total facility and general operation level cost 261,300 261,300 261,300 261,300 1,045,200
Total overhead 304,500 371,000 395,500 329,000 1,400,000
Less: Depreciation 110,000 110,000 110,000 110,000 440,000
Total cash disbursement for overhead 194,500 261,000 285,500 219,000 960,000

Master Budget Schedule – SGA Expense Budget Schedule
Shows the planned amounts of expenditures for selling, general
and administrative expenses during the budget period.
Selling, General, and Administrative Expense Budget
Quarter
Unit Level Expenses
Units (Schedule 1) 5,000 15,000 20,000 10,000 50,000
Sales commissions 6,250 18,750 25,000 12,500 62,500
Total unit level expense 6,250 18,750 25,000 12,500 62,500
Customer level Expenses
Sales personnel salaries 16,000 16,000 16,000 16,000 64,000
Computer operator salaries 18,000 18,000 18,000 18,000 72,000
Telephone operator salaries 6,000 6,000 6,000 6,000 24,000
Total customer level expenses 40,000 40,000 40,000 40,000 160,000
Facility and general operation level expenses
Sales manager's salary 15,000 15,000 15,000 15,000 60,000
Media Advertising 61,000 61,000 61,000 61,000 244,000
Administrative salaries 220,000 220,000 220,000 220,000 880,000
Total facility and general operation level
expenses 296,000 296,000 296,000 296,000 1,184,000
Total SGA Expenses 342,250 354,750 361,000 348,500 1,406,500

Master Budget Schedule – Cash Receipts Budget Schedule
Details the expected cash collections during a budget period.
Cash Receipts Budget
Quarter
Sales Revenue (Schedule 1) 1,125,000 3,375,000 4,500,000 2,250,00011,250,000
Collections in quarter of sale
(80% of revenue) 900,000 2,700,000 3,600,000 1,800,000 9,000,000
Collections in quarter following sale
(18% of prior quarter's revenue) 405,000 202,500 607,500 810,000 2,025,000
Total Cash Receipts 1,305,000 2,902,500 4,207,500 2,610,00011,025,000
Quarter
Expected uncollectible accounts
(2% of revenue) 22,500 67,500 90,000 45,000 225,000

Master Budget - Cash Disbursement Budget Schedule
Details the expected cash payment during a budget period.
Cash Disbursements Budget
Quarter
Cost of raw materials purchases (Schedule 3) 870,600 2,021,800 2,329,400 1,178,200 6,400,000
Cash payments for purchases made during the
quarter (60% of current quarter's purchases) 522,360 1,213,080 1,397,640 706,920 3,840,000
Cash payment for prior quarter's purchases
(40% of prior quarter purchases) 471,280 348,240 808,720 931,760 2,560,000
Total Cash Purchases for raw materials
purchases 993,640 1,561,320 2,206,360 1,638,680 6,400,000
Other Cash Disbursements
Direct Labor (Schedule 4) 45,000 116,250 142,500 71,250 375,000
Unit Level Cost (Schedule 5) 24,000 62,000 76,000 38,000 200,000
Batch and Product Level Cost (Schedule 5) 19,200 47,700 58,200 29,700 154,800
Facility and general operations (Schedule 5) 151,300 151,300 151,300 151,300 605,200
Unit Level Expenses (Schedule 6) 6,250 18,750 25,000 12,500 62,500
Customer Level Expenses (Schedule 6) 40,000 40,000 40,000 40,000 160,000
Facility and general operations (Schedule 6) 296,000 296,000 296,000 296,000 1,184,000
Total Other Cash Disbursements 581,750 732,000 789,000 638,750 2,741,500
Total Cash Disbursements 1,575,390 2,293,320 2,995,360 2,277,430 9,141,500

Master Budget - Cash Budget Schedule
Details the expected cash receipts and disbursements during a budget period.
Cash Budget
Quarter
Cash receipts (Schedule 7) 1,305,000 2,902,500 4,207,500 2,610,000 11,025,000
Less: Cash disbursement (Schedule 8) 1,575,390 2,293,320 2,995,360 2,277,430 9,141,500
Change in cash balance during quarter
due to operations (270,390) 609,180 1,212,140 332,570 1,883,500
Proceeds from bank loan (1/2/x2) 1,000,000 1,000,000
Payments for construction of plant addition (500,000) (120,000) (80,000) (300,000) (1,000,000)
Repayment of principal on bank loan
(end of each quarter) (250,000) (250,000) (250,000) (250,000) (1,000,000)
Interest on bank at 10% per year (25,000) (18,750) (12,500) (6,250) (62,500)
Change in cash balance during the year 821,000
Cash balance 1/1/x2 10,000
Cash balance 12/31/x2 831,000

Master Budget – COGMS Budget Schedule
Details the direct material, direct labor, and manufacturing-overhead costs to be
incurred and shows the cost of the goods to be sold during the budget period.
Budgeted Cost of Goods and Manufactured and Sold
Direct materials (Schedule 3 for details):
Raw materials inventory Jan. 1 (7,200 yards per fabric x $9 per yard) 64,800
Add: Purchases (Schedule 3) 6,400,000
Raw materials available for use 6,464,800
Less: Raw material inventory Dec. 31 64,800
Direct materials used 6,400,000
Direct labor (Schedule 4) 375,000
Manufacturing overhead (Schedule 5) 1,400,000
Total manufacturing cost 8,175,000
Add: Work in process Jan. 1 -
Subtotal 8,175,000
Less: Work in process Dec. 31 -
Cost of goods manufactured 8,175,000
Add: Finished goods inventory Jan. 1
(Schedule 2 - beg and end are the same) 81,750
Cost of goods available for sale 8,256,750
Less: Finished goods inventory Dec. 31 (500 units x $163.50) 81,750
Cost of goods sold 8,175,000

Type of manufacturing cost Amount
Materials, Tent fabric (Schedule 3: 12 x $9 per yard) 108.00
Materials, Tent poles (Schedule 3: 1 x $20 per kit) 20.00
Labor (Schedule 4: 0.5 x $15 per hour) 7.50
Unit level M. Overhead (Schedule 5: 200,000/50,000 units) 4.00
Batch level M. Overhead (Schedule 5: 150,000/50,000 units) 3.00
Product level M. Overhead (Schedule 5: 4,800/50,000 units) 0.10
Facility level M. Overhead (Schedule 5: 1,045,200/50,000 units) 20.90
Total absorption cost per unit 163.50
Manufacturing Cost Schedule

Master Budget – Budgeted Income Statement Schedule
Shows the expected revenue and expenses for the budget period,
assuming that planned operations are carried out.
Budgeted Income Statement
Sales revenue (Schedule 1) 11,250,000
Less: Cost of goods sold (Schedule 10) 8,175,000
Gross margin 3,075,000
Other expenses:
Selling, general, and administrative expenses (Schedule 6) 1,406,500
Uncollectible account expense (Schedule 7: 2% x 11,250,000) 225,000
Interest expense (Schedule 9) 62,500
Total other expenses 1,694,000
Net Income 1,381,000

Master Budget – Budgeted Cash Flow Schedule
Provides information about the expected sources and uses of cash for operating, investing,
and financing activities during a particular period of time.
Budgeted Statement of Cash Flows
Cash flows from operating activities:
Cash receipts from customers (Schedule 7) 11,025,000
Cash payments
To suppliers of raw materials (Schedule 8) 6,400,000
For direct labor (Schedule 4) 375,000
For manufacturing overhead expenditures (Schedule 5) 960,000
For selling, general, and administrative expenses (Schedule 6) 1,406,500
For interest (Schedule 9) 62,500
Total cash payments 9,204,000
Net cash flow from operating activities 1,821,000
Cash flow from investing activities:
Construction of building addition (Schedule 9) (1,000,000)
Net cash used by investing activities: (1,000,000)
Cash flow from financing activities:
Principle of bank loan 1,000,000
Repayment of bank loan (1,000,000)
Net cash provided by financing activities -
Net increase in cash and cash equivalents 821,000
Balance in cash and cash equivalents, beginning of year 10,000
Balance in cash and cash equivalents, end of year 831,000

Master Budget – Budgeted Balance Sheet Schedule Sheet
Shows the expected end-of-period balances for the company’s assets, liabilities, and
owner’s equity, assuming that planned operations are carried out.
Budgeted Balance Sheet
Assets
Current Assets:
Cash (schedule 9) 831,000
Accounts receivables (Schedule 7: 18% of 4th quarter) 405,000
Inventory:
Raw materials (schedule 10) 64,800
Finished goods (schedule 10) 81,750
Supplies 42,000
Total inventory 188,550
Total current assets 1,424,550
Long-lived assets:
Building (balance from last year plus 1M construction of plant) 9,200,000
Equipment 2,280,000
Less: Accumulated depreciation on building and equipment (last year's + 440,000 in Sched. 5) (2,323,550) (43,500)
Building and equipment, net of accumulated depreciation 9,156,450
Total assets 10,581,000
Liabilities and Owner's Equity
Current Liabilities:
Accounts payable (Schedule 8) 471,280
Total current liabilities 471,280
Long-term liabilities
Note payable (non-interest bearing; due on December 21, 20x4 4,100,000
Total liabilities 4,571,280
Owner's Equity (balance from last year's + net income) 6,009,720
Total liabilities and owner's equity 10,581,000

7.2 Flexible Budget and Performance Analysis
After studying flexible budget and performance analysis,
you should be able to:
• Identify the difference between static budget and flexible budget
• Prepare a static budget and explain the performance analysis
• Prepare a flexible budget and explain the performance analysis

Static Budget versus Flexible Budget
• Static budget is prepared at the
beginning of the budgeting period
and is valid for only the planned
level of activity.
• A static budget is suitable for
planning but is inappropriate for
evaluating how well costs are
controlled.
• A flexible budget shows what
costs should be for various levels
of activity.
• Flexible budget is an alternative to
the static budget. A flexible
budget adjusts revenues, costs,
and expenses to the actual volume
experienced and compares these
amounts to actual results.
If the actual level of activity differs from what was planned, it would be
misleading to compare actual cost to the static budget. If the activity is
higher than expected, variable costs should be higher than expected; and if
activity is lower than expected, variable costs should be lower than
expected.

Maria's Parlor Shop
Static Budget
For the Month Ended March 31
Budgeted number of client-visits 5,000
Budgeted variable overhead cost:
Hairstyling supplies (@ $1.20 per client-visit) 6,000
Client gratuities (@ $4 per client-visit) 20,000
Electricity (@ $0.20 per client-visit) 1,000
Total variable overhead cost 27,000
Budgeted fixed overhead cost:
Support staff wages and salaries 8,000
Rent 12,000
Insurance 1,000
Utilities other than electricity 500
Total fixed overhead cost 21,500
Total budgeted overhead cost 48,500

Performance Analysis
Maria's Parlor Shop
Static Budget Performance Report
Actual Budgeted Variances Results
Client-visits 5,200 5,000 200 F
Variable overhead costs:
Hairstyling supplies 6,400 6,000 400 U
Client gratuities 22,300 20,000 2,300 U
Electricity 1,020 1,000 20 U
Total variable overhead cost 29,720 27,000 2,720 U
Fixed overhead cost:
Support staff wages and salaries 8,100 8,000 100 U
Rent 12,000 12,000 0
Insurance 1,000 1,000 0
Utilities other than electricity 470 500 30 F
Total fixed overhead cost 21,570 21,500 70 U
Total overhead cost 51,290 48,500 2,790 U

Maria's Parlor Shop
Flexible Budget
Cost per
client-visit
Activity (in client-visits)
Overhead Costs 4,900 5,000 5,100 5,200
Variable overhead cost:
Hairstyling supplies 1.20 $5,880 6,000 6,120 6,240
Client gratuities 4.00 19,600 20,000 20,400 20,800
Electricity 0.20 980 1,000 1,020 1,040
Total variable overhead cost $5.40 26,460 27,000 27,540 28,080
Support staff wages and salaries 8,000 8,000 8,000 8,000
Rent 12,000 12,000 12,000 12,000
Insurance 1,000 1,000 1,000 1,000
Utilities other than electricity 500 500 500 500
Total fixed overhead cost 21,500 21,500 21,500 21,500
Total budgeted overhead cost $47,960 48,500 49,040 49,580

Performance Analysis
Maria's Parlor Shop
Flexible Budget Performance Analysis
Actual number of client-visits 5,200
Cost per
client-visit
Actual Costs
Incurred for
5,200
Client-Visits
Flexible
Budget Based on
5,200
Client-Visits Variance Results
Overhead Costs
Hairstyling supplies 1.20 $6,400 6,240 160 U
Client gratuities 4.00 22,300 20,800 1,500 U
Electricity 0.20 1,020 1,040 20 F
Total variable overhead cost $5.40 29,720 28,080 1,640 U
Support staff wages and salaries 8,100 8,000 100 U
Rent 12,000 12,000 -
Insurance 1,000 1,000 -
Utilities other than electricity 470 500 30 F
Total fixed overhead cost 21,570 21,500 70
Total budgeted overhead cost $51,290 49,580 1,710 U

Case Analysis
Maria's Parlor Shop
Performances Between Static and Flexible
Overhead Costs Static Budget Flexible Budget
Hairstyling supplies 400 U 160 U
Client gratuities 2,300 U 1,500 U
Electricity 20 U 20 F
Total variable overhead cost 2,720 U 1,640 U
Support staff wages and
salaries 100 U 100 U
Rent - 0 - 0
Insurance - 0 - 0
Utilities other than electricity 30 F 30 F
Total fixed overhead cost 70 U 70 U
Total Budgeted Overhead Cost 2,790 U 1,710 U

Master Budget and Flexible Budget Performance Analysis

Master Budget and Flexible Budget Performance Analysis

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