 Hello in this lecture we're going to talk about the master budget. We're going to go through the sales budget, the production budget, and the materials budget. At the end of this we will be able to list the components of the master budget, create the sales budget, create the production budget, and create the materials budget. First a word from our sponsor. Well actually these are just items that we picked from the YouTube shopping affiliate program but that's actually good for you because these aren't things that we're just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased, and use ourselves. Bayer Dynamic? Not sure if I said that right but this is the DT770 Pro 250 OHM Studio Reference Closed Back Headphones. I wear headphones basically every day for a large part of the day. They are important to me therefore I've gone through many different kinds of headphones. 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So we're going to start off we just want to look at the list and the activities that go through the master budget for a production company something that a company that produces things and this is similar to many types of budgets when we think about the most basic type of budget many people think of well let's take a look at the income statement how we did last year you know basically divided by 12 make some adjustments and that will be our budget for the months going forward to the next year that's the most basic kind of components of the budget and that's how any budget kind of starts off we're going to look at last time's material what happened how did we perform and then make some adjustments into the future as we get more sophisticated of course we want to think about other things into the future other than just past performance like what's the economy going to be like what are some changes what's going to be the effect on the on the sales and our expenses and what not going forward we're going to look at a production budget a production budget for a company that produces things being more complex in many ways and being more linear in the way we have to build it because of the fact that we're producing things and the same principles will apply to many different types of budget so we're going to have to start off with the sales budget that's the first place we need to start off no matter what type of budget we have how much are we going to sell in terms of units of sale if we produce inventory and sell inventory we need to think about how many units we're going to sell and then how much revenue we're going to get on that even if we take it down to our personal budget we want to think about well how much are we going to earn in the future time period for many individuals and many business businesses the amount we may earn may be fairly constant that's why we can take last year's performance and basically budget it forwards but it may change as well for many people it may change our salary may vary and that's the first thing we want to take a look at because we're going to base the rest of the budget on that then once we know how many units we're going to sell we want to come up with the production budget how much stuff are we going to produce in terms of like inventory how many things do we need to produce and you might be saying well that's easy we know how many things we're going to sell therefore we're just going to take how many things we're going to sell that's how many we need to produce and that would be the case if it was like our first year of production and we didn't want and we thought we were going to be very exact in our numbers but we probably want to have a cushion to stuff we want to produce more than we're going to sell in case that we sell more than we thought we were going to sell and we also probably had stuff that we didn't sell last time we had a cushion from last time so we need to take those two things into consideration in terms of figuring out how many things we need to produce in order to meet the sales and these other kind of requirements that we want to have in terms of having a cushion in the inventory once we know how many things we're going to produce then we can think about how much material we need to produce them so let's say we're like making guitars or something we know how many guitars we want to make now we need to figure out how much basically wood we want to put in how much wood do we need to buy in terms of the production of the guitar same kind of inventory type of questions and we have the same kind of problems it's not just that we need to buy the amount of wood in order to produce that many guitars we need to figure out do we want to have an ending inventory of wood left over do we have any wood that's still in the inventory here same thing in terms of direct labor which is a bit more straightforward we're going to say how much direct labor will it take then to make these many units of production that we need to produce and the overhead all the other stuff that's going to be involved what's going to be the budget for the overhead to produce this many units this isn't directly tied out it doesn't have to be happening next but the capital expenditures do we want to buy new larger pieces of equipment and things like this we need to plan out whether we have the cash flow and whether we have we can finance any more large expenditures and then the selling and administrative budget these are going to be the more the period costs these are usually more costs that we can do kind of what we think about in our traditional budget look at what happened last time and project it forward because they're usually more fixed in nature rather than variable in nature along with the production then we can do the cash budget the cash flow that will happen and then we can kind of finally think about our budgeted balance sheet that we always think about our budgeted income statements and our budget statement of cash flow so here's the statements that we're going to create and again most of us think about the budget oftentimes in terms of the income statement here here's how we're going to perform in the future in terms of the income statement but if we break this out into this process we can do this first and then you know create our standard balance sheets from this projections all right so we're going to start off with the sales budget so sales budget here and we'll just break through these first three and then we'll talk about the rest of the budgets at a later time so sales budget we're going to say we're going to do this for the quarter of july august in september in july we're going to say in units we're going to sell 20,600 units now how do we come up with that number if it's a book problem we're going to have to give us that number and if it's real life then we're going to have to project well how much did we produce last time period what's our traditional uh sales for july what's the market like in july and all this kind of stuff and come up with the amount of numbers that we're going to produce in units we'll multiply that times how many we're going to charge per unit and that will of course give us the dollar revenue so we get the unit revenue we got the dollar revenue we'll do the same thing for august we're going to say we're going to produce 19,600 units what do we come up with that number again we're going to project it out and think how do we do last year what's the market like how things can happen but then we just multiply that times our 24 and we come up with a dollar amount for uh 70 400 same for september we're just going to project the 20,100 book problem will give us that real life we'll have to project that in some way probably a very significant process to do that and we're going to have the 24 uh the sales price that gives us the 40 to 400 totals then would be 60,300 units and we would have dollars in revenue of 1,447 200 in terms of revenue now that we know this we can move forward we need how much do we need to make how many units do we need to make if we're going to sell this many units and you might think well we need to make uh 60,300 if we're going to sell 60,300 but once again think about the idea that we may have units that are already in here from last month and we may want to have a cushion because we don't want to have exactly 60,300 units we might sell more than that we don't want to have a shortage in case we do better than we thought in terms of just the budget just the plan here so those two things being in in the factor when we then calculate the production budget so we have the sales budget up here now we're going to say the production budget how many how much stuff and units do we need to produce if we're producing guitars how many guitars do we need to produce for uh this quarter we're going to break it out by month so we're going to say july we're going to say we're going to first do a calculation in terms of how much do we need in order to fulfill our cushion in terms of how much we want to have left over we want to plan in to have a cushion in case we sell more than we thought and so here's how we're going to do that we're going to take the next month's sales so in this case it was the 19 six 19 six we're going to take the august 20,100 20,100 20,100 we're going to have to estimate what it would be for october and then put in the units for uh october and september we're taking next month's totals in terms of unit sales multiplying that times 80 percent why because this is the standard policy that we came up with in order to have a cushion as of the indian inventory this is what we want left over we think we're going to sell so much and we want uh 80 percent of next uh month's sales left over so if we were to multiply that out the 19 six times 80 15 680 20,100 times 80 percent 16,080 20,006 times 80 16 480 that's what we want in indian inventory at the end of july in this case and then we're going to say the budget unit sales we're going to say the budget unit sales we're just pulling these down there's the 20 there's the 19 six there's the 20,100 though that's what we're going to actually sell during the period so we're going to take what we want in the indian inventory plus what we think we're going to actually sell that's how much we're going to need that's going to be the units that we're going to need the units available the units that we would need to produce if we didn't already have some in there from last month but this is not our first year of operation so we have this is what we we need to sell plus the indian inventory cushion we're going to have to subtract out from that what we have in there at the beginning so at the beginning we had uh 16,694 we've got the 15 680 that's going to be of course the ending number here is the beginning number for the next month ending number here is the beginning number for the next month this is where we're starting out with because this is the ending number for the month prior to our budgeting process here and so if we subtract this out the 36,280 minus the 16,694 is the 19,586 the 36,680 minus the 15,680 is the 20,000 the 36,580 minus the 16,820,500 and that's the units that we need to then produce so these are how many units we need to produce now the next thing is well now we can think about the materials the labor the overhead we're going to look at the materials next time so we need to produce like this is guitars it would say if they were producing this many guitars we gotta say well how much wood do we need to get to buy in order to produce that many guitars and you might be thinking well how much wood does it take for each guitar we're going to have to just multiply how much wood it takes for each guitar and that's how much it's going to take but same idea is here and the same idea being that we already have some wood probably from last month and we want to have some extra wood in case we have to actually make more than that number just in case for whatever reason in case our budget is different we want to make sure that we have enough in order to cover the sales that we need to cover so therefore we're going to do a similar calculation here for the material so here's our production budget here we're going to use the production budget to create the raw materials budget how much material do we need to buy to make the stuff we're going to produce so we got the production in units we're just pulling the production down the production in units down so here's the 19 here's the 20 here's the 20,000 five the budgets are connected in this way that's why we got to do it in this order and then we're going to say materials required per unit so if we're thinking about guitars you could think well we're buying a plank of wood and we only need half the plank of wood per guitar so we can make two guitars out of the one plank of wood for talking about other types of things it may mean that we need multiple units of material in order to create the guitar so what depends what we're making and so you got to be careful on how many units is it going to take to make it in this case it takes less than one unit in order to make the product therefore if we're going to make a nineteen five eighty six half times point five it's going to take a nine thousand seven ninety three of planks of wood in this case that we're going to cut in half for each of the units we're going to make so same thing here the twenty thousand to ten the twenty thousand five is the twenty thousand two fifty then we're going to have the budgeted ending inventory so this is how much we would have if we didn't want any cushion at the end but we do we want to have some material left over we want to have some wood leftover at the end of the month so we're going to say I have this cushion in here now the calculation for this and it's going to be dependent the problems are going to have to give it to you in real life we'll have to put in some policy the policy here is that we're going to take next month's number we're going to multiply it times point five so that's the policy of this company so that's going to be the five thousand we're going to take in next month's the ten thousand two fifty times point five five two five one two five and we would have to know october's number which which apparently is eight thousand in order to come up with this four thousand here so then if we then add these two up we've got the materials needed for production this is how much we want in ending inventory so the nine thousand seven ninety three plus the five thousand fourteen seven ninety the ten thousand plus the five one two five is the fifteen one twenty five and so on so this is the materials required if we didn't have any in the beginning inventory that's how much we'd have to buy but we're saying we did have some in the beginning inventory and how much is in there at the beginning of the inventory well we started off with four thousand nine twenty five and then in the next month we've got five thousand of course the beginning uh inventory is now the ending inventory for the next month and same here the beginning inventory for this month is going to be a projected ending inventory for this month all right and then uh we're going to say the materials purchased then is going to be the this number plus this number gives us the nine thousand eight uh sixty eight sixty eight the fifteen one twenty five plus the five thousand is the ten thousand two twenty five the fourteen two fifty plus the uh five one is the nine one two five we're going to multiply that times the material price per unit so how much does it cost per unit in this case we're talking about planks of wood how much does it cost per plank of wood this whole thing we've been looking at units in terms of planks of wood now we got to turn that into dollars and if we just multiply that out then the nine thousand eight sixty eight times the twenty one is the two oh seven two twenty four and so on and so on then if we add this up for the quarter this is the sum in terms of dollars for the quarter this is the sum in terms of units in terms of of planks of wood or units of material in this case