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Chapter 22: Q21E (page 1233)

Describing master budget components

Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.

Short Answer

Expert verified

Answer

The three main parts of the master budget are the operating budget, capital expenditure budget, and financial budget.

Step by step solution

01

Meaning of master budget

The master budget is the collection of various budgets and budgeted financial statements.

02

Three main parts of the master budget and their purpose

Following are the three main parts of the master budget

  1. The operating budget: The set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into the cash budget and then the budgeted financial statements.

  2. The capital expenditure budget: The budget that presents the company’s plan for purchasing property, plant, equipment, and other long-term assets.

  3. The financial budget: The budget includes the cash budget and the budgeted financial statements.

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Most popular questions from this chapter

Preparing an operating budget—sales budget Brown Company manufactures luggage sets. Brown sells its luggage sets to department stores. Brown expects to sell 1,700 luggage sets for \(180 each in January and 2,050 luggage sets for \)180 each in February. All sales are cash only. Prepare the sales budget for January and February.

Using sensitivity analysis in budgeting

Refer to the Berry’s schedule of cash receipts from customers that you prepared in Short Exercise S22-9. Now assume that Berry’s sales are collected as follows:

60% in the month of the sale

20% in the month after the sale

18% two months after the sale

2% never collected

Prepare a revised schedule of cash receipts for January and February.

Question: Meeks Company has the following sales for the first quarter of 2019:

January February March Cash sales \( 5,000 \) 5,500 \( 5,250 Sales on account 15,000 14,000 14,500 Total sales \) 20,000 \( 19,500 \) 19,750 Sales on account are collected the month after the sale. The Accounts Receivable balance on January 1 is $12,500, the amount of December’s sales on account. Calculate the cash receipts from customers for the first three months of 2019.

How is the predetermined overhead allocation rate determined?

Preparing a financial budget—cash budget, sensitivity analysis

Leichter Auto Parts, a family-owned auto parts store, began January with \(10,500 cash. Management forecasts that collections from credit customers will be \)11,000 in January and \(15,200 in February. The store is scheduled to receive \)8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases (\(15,600 in January and \)14,800 in February) and selling and administrative expenses (\(2,900 each month).

Leichter Auto Part'sbank requires a \)10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below \(10,000, the bank automatically extends credit to the store in multiples of \)1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of \(2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.

Requirements

1. Prepare Leichter Auto Part'scash budget for January and February.

2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total \)14,200 instead of $15,200?
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