The Master Budget

Sales Budget

Production Budget

DL Budget

Cash Budget

Pro Forma Bal. Sht

EI Budget

DM Budget

Pro Forma Inc. Stmt

Overhead Budget

Sales Forecast

Capital Budget

Pro Forma SCF

S&A Exp Budget

The Master Budget

The Text Example Hampton Freeze

Tom Willis is the majority stockholder and chief executive officer of Hampton Freeze, Inc., a company he started in 2001. The company makes premium popsicles using only natural ingredients and featuring exotic flavors such as tangy tangerine and minty mango. The company’s business is highly seasonal, with most of the sales occurring in spring and summer.

In 2002, the company’s second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2002 turned out to be overall a very successful year in terms of both cash flow and net income.

With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2003.

In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget.

1

2

3 4 5

6 7

8

9 10

The Sales Budget

A budget showing the number of units, sales

price and total sales for each quarter (or

month).

Research into the history of cash collections at Hampton Freeze indicated that –70% of sales are collected in the

quarter in which the sale is made and – the remaining 30% are collected in

the following quarter.

The Production Budget

A budget showing the number of units that

must be produced during each budget period to

meet sales needs and to provide for the desired

ending inventory.

Finished Units to be

Produced

Expected Sales in Units

Desired EI of

Finished Units

BI of Finished

Units= + -

• Hampton Freeze would like the ending inventory of finished goods to be equal to 20% of next quarter’s sales.

• The company has 2,000 units of beginning inventory.

1.Finished units to be produced

2.Equals expected sales in units

3.Plus Desired EI of finished units.

4.Less BI of finished units.

Desired Ending Inventory of

Finished Goods equals 20% of next

quarter’s sales.

Ending Inventory for one quarter equals Beginning Inventory for next

quarter.

Notice how inventories are accounted for on the spreadsheet.

Required Purchases

of Raw Materials

Amount Required

for Productio

n

Desired EI of Raw

Materials

BI of Raw

Materials

= + -

The Direct Materials Purchases Budget

A budget showing the raw materials that must

be purchased to fulfill the production budget and to

provide for adequate inventories.

• Hampton Freeze has established a policy of maintaining RM equal to 10% of the amount required for production in the subsequent quarter.

• In the first quarter the company plans on producing 14,000 units (from the production budget)

• Each unit requires parts costing $0.20.

• To prepare the Schedule of Expected Cash Disbursements for Materials, Hampton’s policy is to –Pay for 50% of purchases in the

quarter in which the purchase is made, and

–Pay the remaining 50% in the following quarter.

1.Required purchases of Direct Materials

2.Equals amount required for production.

3.Plus Desired EI of raw materials.

4.Less BI of raw materials.

The Direct Labor Budget

A budget showing the direct labor hours (and

total amount) needed to produce the number of

units specified in the production budget.

• Each case produced requires 0.4 direct labor hour.

• Each hour costs $15

The Direct Labor Budget

The MOH Budget

A budget showing all costs of production other than direct materials and

direct labor.

The MOH Budget

The Ending Finished Goods Inventory

Budget

A budget showing the carrying cost of the

unsold units remaining in inventory.

The Ending FG Inventory Budget

The Selling and Administrative

Expense Budget

A budget showing expenses for areas other

than manufacturing.

The S&A Expense Budget           

HAMPTON FREEZE, INC.Selling and Administrative Cash Disbursement

For the Year Ended December 31, 2003           

  Quarter  

  1st 2nd 3rd 4th Year

Salaries          

Freight out          

Advertising          

Other expense          

Total 93,000 $ 130,900 $ 184,750 $ 129,150 $ 537,800            

           

HAMPTON FREEZE, INC.Other Cash Disbursements Projections

For the Year Ended December 31, 2003           

  Quarter  

  1st 2nd 3rd 4th Year

Equipment Purchase 50,000 40,000 20,000 20,000 130,000

Dividends 8,000 8,000 8,000 8,000 32,000

           

The Cash Budget

The Budgeted (Pro-Forma) Income

Statement

The Budgeted Balance Sheet