Chapter 9: Financial Planning and Analysis : The Master Budget

Question 9.1
Explain how a budget facilitates communication and coordination.
A budget facilitates communication and coordination by making each manager throughout
the organization aware of the plans made by other managers. The budgeting process pulls
together the plans of each manager in the organization.

Question 9.2
Use an example to explain how a budget could be used to allocate resources in a
university.
An example of using the budget to allocate resources in a university is found in the area of
research funds and grants. Universities typically have a limited amount of research-support
resources that must be allocated among the various colleges and divisions within the
university. This allocation process often takes place within the context of the budgeting
process.

Question 9.3
Explain what a master budget is, and list five of its parts. Try to keep them in sequence.
A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an
organization's operations for a specified period of time. The master budget includes the
following parts: sales budget, operational budgets (including a production budget, inventory
budgets, a labor budget, an overhead budget, a selling and administrative expense budget, and
a cash budget), and budgeted financial statements (including a budgeted income statement,
budgeted balance sheet, and budgeted statement of cash flows).

Question 9.5
Give an example of how general economic trends would affect sales forecasting in the
airline industry.
General economic trends are important in forecasting sales in the airline industry. The overall
health of the economy is an important factor affecting the extent of business travel. In
addition, the health of the economy, inflation, and income levels affect the extent to which
the general public travels by air. For example, with inflation and rising price levels, consumer
confidence falls and spending decreases. Airlines may therefore budget lower sales in future
quarters of the year.
Question 9.6
What is meant by the term operational budgets? List three operational budgets that
would be prepared by Memorial Sloan Kettering Cancer Center in New York.
Operational budgets specify how an organization's operations will be carried out to meet the
demand for its goods and services. The operational budgets prepared in a hospital would
include a labor budget showing the number of professional personnel of various types
required to carry out the hospital's mission, an overhead budget listing planned expenditures
for such costs as utilities and maintenance, and a cash budget showing planned cash receipts
and disbursements.

Question 9.18
List the steps you would go through in developing a budget to meet your college
expenses.
In developing a budget to meet your college expenses, the primary steps would be to project
your cash receipts and your cash disbursements. Your cash receipts could come from such
sources as summer jobs, jobs held during the academic year, college funds saved by relatives
or friends for your benefit, scholarships, and financial aid from your college or university.
You would also need to carefully project your college expenses. Your expenses would
include tuition, room and board, books and other academic supplies, transportation, clothing
and other personal needs, and money for entertainment and miscellaneous expenses.

Exercise 9.23
Budgeting Production and Direct-Material Purchases (LO 9-3, 9-6)
Bodin Company budgets on an annual basis. The following beginning and ending inventory
levels (in units) are plannned for the year 20x1. Two units of raw material are required to
produce each unit of finished product.

Required:
1. If Bodin Company plans to sell 480,000 units during the year, compute the number of
units the firm would have to manufacture during the year.
Production unit
Expected unit sales 480,000
Desired ending inventory 50,000
Less: Beginning inventory (80,000)
Units to be produced 450,000

2. If 500,000 finished units were to be manufactured by Bodin Company during the

year, determine the amount of raw material to be purchased.
Production in units 500,000
Materials per unt 2
Production needs 1,000,000
Desired ending inventory 45,000
Less: Beginning inventory (35,000)
Materials to be purchased 1,010,000

Problem 9.32
Revenue and Labor Budgeting for a University; Budget Linkage(LO 9-3, 9-5, 9-7, 9-8)
Western State University (WSU) is preparing its master budget for the upcoming academic
year. Currently, 8,000 students are enrolled on campus; however, the admissions office is
forecasting a 5 percent growth in the student body despite a tuition hike to $75 per credit
hour. The following additional information has been gathered from an examination of
university records and conversations with university officials:
 WSU is planning to award 120 tuition-free scholarships.
 The average class has 25 students, and the typical student takes 15 credit hours each
semester. Each class is three credit hours.
 WSU’s faculty members are evaluated on the basis of teaching, research, and university
and community service. Each faculty member teaches five classes during the academic
year.

Required:
1. Prepare a tuition revenue budget for the upcoming academic year.
Current student enrolment 8,000
 Add: Increase of 5% in student body (8,000 x 400
5%)
Total student body 8,400
Less: Tuition-free scholarships 120
Total tuition-paying students 8,280
Credit hours per student per year (15 x 2) X 30
Total credit hours 248,400
Tuition rate per hour (in $) X 75
Total tuition revenue budget $ 18,630,000

2. Determine the number of faculty members needed to cover classes.

Total student body 8,400
Classes each student takes per year* X 10
Total student class enrollment to be covered 84,000
Student per class ÷ 25
Total classes to be taught 3,360
Classes taught per professor ÷5
Total faculty members needed 672
*(15 credit hours / 3 credit hours per class) X 2 semester

3. Assume there is a shortage of full-time faculty members. List at least five actions that
WSU might take to accommodate the growing student body.
 Hire part-time instructors
 Increase the teaching load for each professor
 Increase the class size and reduce the number of every section to be offered
 Use graduate teaching assistants
 Shift courses to a summer session // Add special semester for specific class

4. You have been requested by the university’s administrative vice president (AVP) to
construct budgets for other areas of operation (e.g., the library, grounds, dormitories,
and maintenance). The AVP noted: “The most important resource of the university is
its faculty. Now that you know the number of faculty needed, you can prepare the other
budgets. Faculty members are indeed the key driver—without them we don’t operate.”
Does the administrative vice president really understand the linkages within the
budgeting process? Explain.
No, the administrative vice president are not really understand the linkages within the
budgeting process. This is because while the number of faculty may be a key driver, the
number of faculty is highly dependent on the number of students. Students who pay the
tuition fee are akin to sales which are the starting point in the budgeting process.
1. Janzen Berhad sells its entire product on account. Janzen has the following collection
experience for its sales on account:

Percent paid in the month of sale 20%

Percent paid in the month after the sale 60%
Percent paid in the second month after the sale 15%

To encourage payment in the month of sale by customers, Janzen gives a 2% cash discount.
Janzen Berhad’s anticipated sales for the next few months are:
April RM200,000
May RM220,000
June RM230,000
July RM210,000
August RM250,000
As Janzen Berhad’s management accountant, you are asked to do the following:
a) Prepare a cash receipts budget for July.
Sales in May (15% of RM220,000) 33,000
Sales in June (60% of RM230,000) 138,000
Sales in July (20% of RM210,000) 42,000
Less: 2% cash discount (840) 41,160
Total estimated cash receipts 212,160

b) Prepare a cash receipts budget for August.

Sales in June (15% of RM230,000) 34,500

Sales in July (60% of RM210,000) 126,000
Sales in August (20% of RM250,000) 50,000
Less: 2% Cash discount (1,000) 49,000
Total estimated cash receipts 209,500
2. The following information pertains to Amigo Corporation:
Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000

 Cash is collected from customers in the following manner:

Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%

 40% of purchases are paid for in cash in the month of purchase, and the balance is
paid in the following year.

Required
a) Prepare a summary of cash collections for the 4th quarter.
 October November December Quarter
Sales in August 5,100
(15% x 34,000) 5,100
Sales in September
(50% x 38,000) 19,000 19,000
(15% x 38,000) 5,700 5,700
Sales in October
(30% x 42,000) 12,600 12,348
(50% x 42,000) 21,000 21,000
(15% x 42,000) 6,300 6,300
Less: 2% cash (252)
discount 12,348
Sales in November
(30% x 48,000) 14,400 14,112
(50% x 48,000) 24,000 24,000
Less: 2% cash (288)
discount 14,112
Sales in December
(30% x 60,000) 18,000
Less: 2% cash (360)
discount 17,640 17,640
Total cash 36,448 40,812 47,940 125,200
collection

b) Prepare a summary of cash disbursements for the 4th quarter.

October November December Quarter
Purchase in 8,400 8,400
September
(60% x 14,000)
Purchase in October
(40% x 16,000) 6,400 6,400
(60% x 16,000) 9,600 9,600
Purchase in
November 7,200 7,200
(40% x 18,000) 10,800 10,800
(60% x 18,000)
Purchase in December
(40% x 20,000) 8,000 8,000
Total cash 14,800 16,800 18,800 50,400
disbursement