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.
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2
3 4 5
6 7
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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