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Running Head: MASTER BUDGETING WITH IKEA; CASH DISBURSEMENT AND RECEIPTS

Master Budgeting with IKEA; Cash disbursement and receipts Managerial Accounting Sungah Byeon (5480015) Youngji Lee (5480106) Hyunjeong Lee (5480110) Suin Kim (5543030) Sehyun Lee (5543197) Jueun Gu (5543320) Sihyeong Ha (5543581) Keimyung Adams College

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The Definition of ‘Master Budget’ A master budget is the aggregation of all lower-level budgets produced by a company’s various functional areas, and includes budgeted financial statements, a cash forecast, and a financing plan as well. The master budget is typically presented in either a monthly or quarterly format, and usually covers a company’s entire fiscal year. It is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. The Structure of ‘Master Budget’ The master budget consists of two main parts: a budgeted income statement and the budgeted balance sheet. More specifically, the budgeted income statement includes sales budget, cost of goods sold budget (including production budget, direct materials purchases budget, direct labor cost budget, manufacturing overhead cost budget) and selling and administrative expenses budget. And the budgeted balance sheet includes cash budget and capital expenditures budget. The following exhibit shows the relationship among the income statement budgets:

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TheAdv ant ag e sandDi s a dv ant a g e so f‘ Ma s t e rBudg e t ’ 1. Advantages 1) The high-level visualization of the company’s finances: One of the main reasons for a master budget is to give the business owner or company executives an overview of the company’s budget. The master budget reveals how much a company would earn and spend as a whole and shows whether the business would be in good or negative financial standing. 2) The identification of possible future fiscal issues earlier: A master budget has the ability to identify problems and plan ahead. For example, the master budget can show a company if one department is spending beyond its limit. In order to fix the problem, the company can identify which department is spending excessively by looking at the individual department budgets. Then, the company would modify the problems and make better financial plans. 2. Disadvantages 1) No specificity between departments or work group: The dollar amounts and numbers written on the master budget are a collective sum of all of the departments’ expenses and earnings. More specifically, a company has difficulty in determining how much the marketing department is spending on a monthly basis as the amount will be added to all of the other departments’ spending as one sum. 2) Difficult to read and update: This is because of the many categories and numbers that are included in the budget. Therefore, if a company run the bigger scale of

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business or corporation, the company would have more trouble in understanding and modifying a master budget. The Beginning Balance Sheet Figure 1 is the balance sheet of IKEA for August 31, 2019. IKEA's Balance sheet is based on August 31, not the end of the year.

The Budgeting Assumptions The budgeting assumption summarize the estimates and assumptions that provide the foundation for entire master budget. Also, it does not require adjusting data inputs within each master budget schedules. Formulas embedded in each of the budget schedules would automatically update the projected financial result.

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In the figure 2, IKEA budgets quarterly sales at 55,000,000, 35,000,000, 25,000,000 and 45,000,000. Lot of sales are expected at first quarter and fourth quarter. It is budgeted selling price is 155€ per product. The company expects to collect 60% of its credit sales in the quarter of sales, and the remaining 40% of credit sales will be collected in the quarter after sale. Also, IKEA will maintain ending finished goods inventory equal to 30% of the next quarter’s unit sales. The direct labor budget is that 0.7 direct labor-hours are required per product and the direct labor cost per hour is 14€. The variable overhead cost per direct labor-hour is 10€, the total fixed overhead per quarter is 55,000€ and the quarterly depreciation on factory assets is 27,250,000€. The budgeted variable selling and administrative expense per product is 2€ and fixed selling and administrative expenses per quarter include advertising, executive salaries, insurance, property tax and depreciation. IKEA expects to maintain a minimum cash balance each quarter of 150,000,000€. It plans to pay make quarterly equipment purchases of 330,000,000€, 200,000,000€ 120,000,000€ and 101,000,000€. It plans to pay quarterly dividends of 187,500,000€, and it expects to pay simple interest on borrowed money of 3% per quarter. For simpli purcha

pment

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The Sales Budget Sales budget is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process. It is based on the company’s sales forecast, which may require the use of sophisticated mathematical models and statistical tools. Sales budget can be completed with three calculations. Total sales are the amount of budgeted unit sales times selling price per unit. Within quarter sales is by quarter sales times percentage of sales collected in the quarter of sale. Next quarter sales are calculated by quarter sales times percentage of sales collected in the quarter after sale. Total cash collections for the quarter is within quarter sales plus next quarter sales. Figure 3 is IKEA sales budget for August 31, 2020. For the year IKEA expects to sell 160,000,000 furniture at a price of 155€ per products for total budgeted sales of 24,800,000€. The budgeted sales for the first quarter equal 8,525,000,000€. In the first quarter, IKEA expects to collect 60% of this amount. The accounts receivable of 4,046,000,000€ that is collected in the first quarter. The company expects to collect the remaining 40% of this in the second quarter. Beginning accounts receivable is cash collections from last year’s fourth quarter sales. So, first quarter expects 9,161,000,000€ for total cash collections. The company expected total cash collections for 2020 are 26,056,000,000€. Uncollected fourth quarter sales appear as accounts receivable on the company’s budgeted balance sheet.

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Pr o duc t i o nBudg e t Thep r o d u c t i onbu d g e ti san e x ts t e po fs a l e sbu d g e t .Compa n i e su s u a l l yma k ebu d g e tf o r c h e c ki n gho w muc ht he ys h ou l ds e l li nn e x tp e r i o da n da f t e rt ha t ,p l a nh o w muc ht he yp r o d uc e f o ra c hi e vi n gt h e i rg oa l s . Fo rt h i s ,t h e yma k eapr o d u c t i onb u d g e t . An dt h ed e t e r mi n a t i o nsf orp r od u c t i onbu d g e ta r eb u d g e t e du n i ts a l e s ,a ddde s i r e du n i t so f e n d i n gfin i s he dg o od si n v e nt o r y ,t o t a ln e e ds ,l e s su ni t so fb e g i nn i n gfin i s h e dg o od si n v e n t o r ya n d r e q u i r e dpr o d uc t i o ni nu n i t s . Th e ya r ei n flue n c e db yt h ede s i r e dl e v e lo ft h ee nd i n gfin i s h e dg o od s i n v e n t o r ywh i c ht h enu mbe ro fpr o du c t i o nt ha tc o mpa n yp l a nt oma n u f a c t ur ei nt h ep e r i o d . Be c a u s ei ft h e r ei sn ob ud g e tf ort hi s ,c o mp a n yc o ul df a c et heo v e r s t o c k e di n v e nt or ya n di two ul d c r e a t es t o r a g ep r o b l e ma n dl e a dt ol o s ts a l e sa ndh i ghc o s t s .

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Ne xt ,h o wc a nc omp a n yb u d g e ti t ?Fo rt h ec a s eo fI KEA,i nfig ur e4 ,pe r c e n t a g eo fn e x t q ua r t e r ’ ss a l e si ne nd i n gfini s he dg o od si n v e n t o r yi s3 0p e r c e nt .Th i si st h ea s s u mp t i o na ndi t me a n s30p e r c e n to ffini s he dg oo d sa r es o l di nne xtq u a r t e r .Ther e a s ont oc h o os e3 0i sbe c a u s e I KEAs e l l sf u r ni t u r ea n di t se x p i r a t i o nd a t ei sl on g e rs oi ti se a s i e rt os e l lp r od u c t si nn e x tq u a r t e r t h a nc a nd i e swh o s ec omp a n yha s20pe r c e n tofi t .Wi t ht hi sc o nd i t i o n ,‘ de s i r e du ni t sofe n di n g fin i s h e dg oo d si n v e nt or y ’i sc o mp ut e db ymul t i p l yi n gb ud g e t e ds a l e sb yt h ed e s i r e de n di n g fin i s h e dg oo d si n v e nt or y .An ds i n c ei ti sc a l c ul a t i o na b ou th o w muc he nd i n gfin i s he dg o o dsa r e s o l di nn e x tq u a r t e r ,t h eb ud g e t e du ni ts a l e so fn e x tq u a r t e ri sb r o u g h tt o‘ a d dde s i r e dun i t so f e n d i n gfini s he dg oo d si n v e nt or y ’o ft hi sq u a r t e r . Fr o mt h i swa y ,wec a nc a l c u l a t ef r o mb u d g e t e dun i ts a l e st ot o t a ln e e ds .Bu d g e t e du ni t s a l e sa r ea l r e a d yi n t r o du c e df or me rp r e s e nt e r ,f r o m fir s tq ua r t e r ,55mi l l i on ,35mi l l i o n,2 5 mi l l i o na nd4 5mi l l i o n.Ne xt ,d e s i r e de n di n gfin i s he dg oo d si n v e n t o r i e sa r ec a l c u l a t e da st h os e . Ho we v e r ,o n4thq ua r t e r ,wea s s u me db ud g e t e ds a l e so nn e x tq u a r t e ra s53 mi l l i onb e c a u s eus u a l l y o nt h efir s tq u a r t e ro fy e a r ,s a l e sa r eh i g h e rt ha nf ol l o wi n gq u a r t e r ss owea s s u me di ta s5 3mi l l i o n s i mi l a rwi t h1stq ua r t e rof20 1 9 .An da sy ouc a ns e e , 4thq ua r t e r ’ sa mo un ti ss a mewi t ht h ea mo u nt o ft o t a ly e a r . I ti sn o tt hes u moft hee n di n gfin i s he dg o od si n v e nt or i e sf o ra l lf o urq u a r t e r s . Fu r t he r mor e ,t o t a ln e e d swh i c hi sc a l c u l a t e db ya d di n gbu d g e t e du ni ts a l e sa ndd e s i r e d u n i t sofe n d i n gi n v e nt or y .Asd i s c u s s e da bo v e ,t hee nd i n gi n v e nt or yi si n t e nd e dt opr o v i d es o me c u s hi o ni nt h ee v e ntt ha tp r ob l e msd e v e l o pi npr o d u c t i on , ors a l e si n c r e a s eun e x p e c t e d l y . Be c a u s e t h eI KEA a l r e a d yha s6 . 7mi l l i onc a s e si nbe g i n ni n gfin i s h e dg oo d si n v e nt or y ,o nl y5 8 . 8mi l l i on c a s e sne e dt ob ep r od u c e di nt hefir s tq u a r t e r .Fr o mt h es t a n dp o i ntoft h ee n t i r ey e a r ,t h e

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b e gi n n i n gfin i s h e dg oo d si n v e nt or ywh i c hi s27mi l l i o ni st h es a mea st heb e g i n n i n gfin i s h e d g o o dsi n v e nt or yf ort h efir s tq u a r t e r .I ti sn o tt h es um oft h eb e g i n n i n gfini s h e dg o o d si n v e nt o r i e s f o ra l lf o urq u a r t e r s . Th a ti st hep o i ntt ha tbu d g e tma k e rh a st op a ya t t e nt i o n. I KEA p r e pa r e sapr o du c t i onb u d g e tb e c a u s ei ti sama nu f a c t u r i n gc o mp a n ybu ti ti sa l s o me r c h a n di s i n gc o mp a n ywh e r es e l l si t so wnpr o du c t st oc u s t ome r sd i r e c t l y .Fo rme r c ha n d i s i n g a s pe c t ,wec a nc h a n g eb u d g e tp r e pa r a t i o nwh i c ha r et h ed i ffe r e nc e sbe t we e nbo t hki n dsof b u s i ne s s .Sp e c i fic a l l y ,t h eb u d g e t e du ni ts a l e sa r ec ha n g e dt ob ud g e t e dc o s to fg oo d ss o l d,e n di n g fin i s h e dg oo d si n v e nt o r yt oe n d i n g me r c h a n di s ei n v e nt or ya n db e g i n ni n g fini s he dg o o ds i n v e n t o r yt obe g i n ni n gme r c h a n di s ei n v e n t o r y .

Direct Materials Budget A Direct Materials Budget is prepared after the production requirements have been computed. This budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. The required purchases of raw materials are usually computed as: Required production in units of finished goods, units of raw materials

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needed per unit of finished goods, units of raw materials needed to meet production, add desired units of ending raw materials inventory, total units of raw materials needed, less units of beginning raw materials inventory, units of raw materials to be purchased, units cost of raw materials, and cost of raw materials. There are two basic calculations for direct materials budget. Adding raw materials required for production and planned ending inventory balance results total raw materials. When we get the total raw materials, deduct beginning raw materials inventory from total raw materials, which results raw materials to be purchased. In the case of Direct Materials budget of IKEA, the numbers of required production in units are same as the final cost numbers of production budget. Then, multiply the production units cost by units of raw materials needed per production, which is assumed as 5, results units of raw materials needed to meet production. In first quarter of add desired units of ending raw materials inventory, bring numbers from the units of raw materials needed to meet production multiplied by 10%, which is the percentage of next quarter’s production needs in ending inventory. Then add two of them to get the total units of raw materials needed. In case of less units of beginning raw materials inventory, bring numbers from previous quarter units from add desired units of ending raw materials inventory. Then, add the total units of raw materials needed with less units of beginning raw materials inventory, that results units of raw materials to be purchased. Our group assumed about 4 euros for the cost of raw materials per piece and

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multiplied with units of raw materials to be purchased, which results the cost of raw materials to be purchased.

Continued from the direct materials budget, to find the expected cash disbursements of purchases of materials, our group assumed the beginning accounts payable as 5, 742,000,000 Euro. To calculate the first-quarter purchases, we brought first-quarter cost of raw materials to be purchased and multiplied by 50% each, which is our assumed percentage of purchases in the quarter and the quarter after purchase. That results 500,000,000 Euro for the first quarter purchases in first-quarter and the second-quarter. We do the same calculation until the fourthquarter purchases. For total cash disbursements for materials, sum the units for each column and add everything to find the year budget of direct materials budget. Direct Labor Budget Moving on to the Direct Labor Budget, this budget shows the direct labor-hours required to satisfy the production budget. It is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period. The basic calculation used for the direct labor budget is to multiply the units to be produced by the direct labor time needed to make each unit. Then, multiply the result by the average direct labor cost per hour.

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In the case of Direct Labor Budget of IKEA, our group brought the required production in products from the production budget just like the direct materials budget, and multiply the production cost by direct labor-hours required per product, which is 0.7, and that results the total direct labor-hours needed. Then, multiply total direct labor-hours needed by direct labor cost per hour, which our group set as 14 Euros, it results total direct labor cost of each quarter. Manufacturing Overhead Budget Lastly, the manufacturing overhead budget lists all costs of production other than direct materials and direct labor. The information in the manufacturing overhead budget becomes part of the cost of goods sold line item in the master budget.

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In the case of Manufacturing Overhead Budget of IKEA, the budgeted direct labor hours is equal to total direct labor-hours needed. After bringing those numbers, multiply them with variable manufacturing overhead rate, which is 10%, that results variable manufacturing overhead. Then, our group assumed the fixed manufacturing overhead as 55,000 and add them with the variable manufacturing overhead to get the total manufacturing overhead. IKEA’s depreciation per quarter is 27,250,000 and deduct the depreciation from total manufacturing overhead which results cash disbursements for manufacturing overhead. From the total manufacturing overhead and budgeted direct labor-hours, we can find predetermined overhead rate for the year. When dividing the total manufacturing overhead by the direct labor-hours and get the predetermined overhead rate for the year, the numbers are calculated correctly. These were the direct materials budget, direct labor budget, and manufacturing overhead budget of IKEA. The Ending Finished Goods Inventory Budget The ending finished goods inventory budget calculates the cost of the finished goods inventory at the end of each period, and it requires three main costs: direct materials, direct labor, and overhead allocation. This budget is to help determine cost of goods sold on the budgeted income statement and to value ending inventories on the budgeted balance sheet. Also, this budget contains the computation of cost of unsold units. To budget this ending finished goods inventory in euros, companies should multiply the quantity of each items (direct materials, direct labor, manufacturing overhead) with cost of each items, and then sum all of them as total. Then, multiply the total with the ending finished goods inventory.

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Applying this method to the budget of IKEA, the quantity of direct materials and the cost of direct material per piece are multiplied. Then, the direct labor hours and the cost per hour of direct labor are multiplied, and same process with manufacturing overhead. Finally, the unit production cost will be calculated, which is 36.80 euros. Previously calculated ending finished goods inventory in products, which was 15.9 million should be multiplied with calculated unit product cost. Then, the ending finished goods inventory in euros, about 585 million euros should be.

The Selling and Administrative Expense Budget This budget is selling and administrative expense, all expenses that occur outside of the manufacturing division. It composes of the sum of variable cost and fixed cost. To determine the cash disbursements for selling and administrative items, the total budgeted selling and administrative expense is adjusted by subtracting any noncash selling and administrative expenses. For the remarkable example of noncash, depreciation should be a part of the calculation for depreciation is not paid with cash.

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To budget the Cash disbursements for selling and administrative expenses (subtraction depreciation from total selling and administrative), selling and administrative expense of both variable and fixed should be respectively calculated. For variable selling and administrative expense, companies should multiply budgeted unit sales with variable selling and administrative expense per product. For fixed selling and administrative expense, all different categories of fixed expenses should be added and then sum with variable expenses. At the final step, less the noncash selling expense...