TOPIC 5
Annual Profit Plan and
Supporting Schedules
T he master budget, or annual profit plan, has many compo-
nents and supporting schedules. Each of these pieces provides specific information
that the organization can use to review its current operations and develop its plans for
the short and long term. The forecasts and assumptions used in creating each compo-
nent and the interplay of the components present an opportunity for effectively man-
aging the organization toward its objectives.
This topic looks at the individual elements that come together to form the mas-
ter budget. It describes the budgets for sales, production, direct materials, direct
labor, overhead, cost of goods sold, and selling and administrative expenses. These
are used to develop the operating budget and the pro forma income statement. It
also discusses the cash budget, the capital expenditure budget, and the pro forma
balance sheet and statement of cash flows that make up the financial budget.
READ the Learning Outcome Statements (LOS) for this topic as found in
Appendix A and then study the concepts and calculations presented here
to be sure you understand the content you could be tested on in the
CMA exam.
Master Budget
The master budget provides all of an entity’s budgets and plans for the operating
and financing activities of its subunits. It is the place where everything must add
up, where strategy and long-term plans meet up with short-term objectives.
The master budget is made up of the quantitative projections of many different
budgets for a company on an annual basis. Other shorter-duration time periods are
also prepared. The master budget has two major components: the operating budget
and the financial budget.
The operating budget includes the sales budget, the production budget, the direct
materials budget, the direct labor budget, the overhead budget, and the selling and
197
,198 CMAexcel Self-Study Part 1: Financial Planning, Performance, and Analytics
administrative (S&A) expense budget. All of these budgets culminate in the forma-
tion of the pro forma (or budgeted) income statement. The financial budget includes
the capital expenditures budget, the cash budget, and the pro forma (or budgeted)
balance sheet and statement of cash flows.
Figure 1B-29 shows how the components of the master budget are related.
Figure 1B-29 Master Budget
Sales Budget
Production Budget
Direct Material Direct Labor Factory Overhead
Operating Budgets Cost of Goods Sold Budget
Selling Expense Budget
Administrative Expense Budget
Budgeted Income
Capital Budget
Statement
Budgeted Balance Sheet Cash Budget
Financial Budgets
Budgeted Statement
of Cash Flows
The operating budgets are prepared in the order shown. As they are pre-
pared, each component provides information that is used to prepare the subse-
quent components of the operating budgets. It will also provide line items of the
financial budgets. One example is the finished goods inventory amount on the
balance sheet.
Operating Budget
In creating an operating budget, the various pieces are assembled, including, for
instance, the sales budget, the production budget, the direct materials budget,
the direct labor budget, the overhead budget, and the S&A expense budget. The
individual operating budgets are then used to create the pro forma (or budgeted)
income statement.
, Section B, Topic 5—Annual Profit Plan and Supporting Schedules 199
LOS
Sales Budget
§1.B.5.b
An accurate sales forecast is needed to create the sales budget. A sales forecast is a
subjective estimate of the entity’s future sales for the upcoming period. Without an
accurate sales forecast, all other budget elements will be inaccurate. Forecasters con-
sider historical trends for sales, but also take into consideration economic and indus-
try conditions and indicators, competitors’ actions, rising costs, policies on pricing
and extending credit, the amount of advertising and marketing expenditures, the
number of unfilled back orders, and sales in the sales pipeline (unsigned prospects).
Sales forecasts should be prepared using statistical analysis techniques such as
LOS
§1.B.5.c regression analysis and rely on sales managers’ knowledge about their market and
customer needs. Once a company has determined its forecasted sales level, based on
its long- and short-term objectives, it forms a sales budget to accomplish its goals.
The two key components of the sales budget are the projected number of sales units
and the projected selling prices for the upcoming periods.
For example: Figure 1B-30 shows the sales budget of Robin Manufacturing
Company for the third quarter.
Figure 1B-30 Sales Budget
Robin Manufacturing Company Sales Budget
for the Quarter Ended September 30, Year 1
July August September Quarter Ref #
Sales in units 70,000 72,000 77,000 219,000 1
Selling price per unit $110.80 $110.80 $112.00 (varies)
Total sales $7,756,000 $7,977,600 $8,624,000 $24,357,600 2
It is important to note that the sales budget drives the operating budget because
LOS
§1.B.5.a it impacts how many units will need to be produced (production costs), as well as
the selling and administrative expenses needed to achieve those forecasted sales.
The development of the sales budget is extremely challenging because there
are hardly any one-product companies. The real problem is that there may be so
many products that it’s not practical to develop forecasts by individual products.
Instead, the forecasts are likely to be done at the level of product categories and then
broken down into sales of individual products. If sales budgets are to be prepared
at a grassroots level (such as sales territory), then there must be a reasonable way
to eliminate over-/under-optimism from the budgets prior to rolling them up to
higher levels of summation. Because the elapsed time to prepare the budget may be
very long, and knowing that problems in the sales budgets trickle down to all the
subsequent budget components, a company cannot afford to get to the pro forma
income statement and discover that the forecasted sales level does not produce a
satisfactory net income amount. A way to prevent this from happening is to project
either contribution margin or gross profit using rules of thumb while preparing the
sales budget. If the result looks likely to be unsatisfactory, determining other means
to improve sales or to reduce costs must be considered.
Annual Profit Plan and
Supporting Schedules
T he master budget, or annual profit plan, has many compo-
nents and supporting schedules. Each of these pieces provides specific information
that the organization can use to review its current operations and develop its plans for
the short and long term. The forecasts and assumptions used in creating each compo-
nent and the interplay of the components present an opportunity for effectively man-
aging the organization toward its objectives.
This topic looks at the individual elements that come together to form the mas-
ter budget. It describes the budgets for sales, production, direct materials, direct
labor, overhead, cost of goods sold, and selling and administrative expenses. These
are used to develop the operating budget and the pro forma income statement. It
also discusses the cash budget, the capital expenditure budget, and the pro forma
balance sheet and statement of cash flows that make up the financial budget.
READ the Learning Outcome Statements (LOS) for this topic as found in
Appendix A and then study the concepts and calculations presented here
to be sure you understand the content you could be tested on in the
CMA exam.
Master Budget
The master budget provides all of an entity’s budgets and plans for the operating
and financing activities of its subunits. It is the place where everything must add
up, where strategy and long-term plans meet up with short-term objectives.
The master budget is made up of the quantitative projections of many different
budgets for a company on an annual basis. Other shorter-duration time periods are
also prepared. The master budget has two major components: the operating budget
and the financial budget.
The operating budget includes the sales budget, the production budget, the direct
materials budget, the direct labor budget, the overhead budget, and the selling and
197
,198 CMAexcel Self-Study Part 1: Financial Planning, Performance, and Analytics
administrative (S&A) expense budget. All of these budgets culminate in the forma-
tion of the pro forma (or budgeted) income statement. The financial budget includes
the capital expenditures budget, the cash budget, and the pro forma (or budgeted)
balance sheet and statement of cash flows.
Figure 1B-29 shows how the components of the master budget are related.
Figure 1B-29 Master Budget
Sales Budget
Production Budget
Direct Material Direct Labor Factory Overhead
Operating Budgets Cost of Goods Sold Budget
Selling Expense Budget
Administrative Expense Budget
Budgeted Income
Capital Budget
Statement
Budgeted Balance Sheet Cash Budget
Financial Budgets
Budgeted Statement
of Cash Flows
The operating budgets are prepared in the order shown. As they are pre-
pared, each component provides information that is used to prepare the subse-
quent components of the operating budgets. It will also provide line items of the
financial budgets. One example is the finished goods inventory amount on the
balance sheet.
Operating Budget
In creating an operating budget, the various pieces are assembled, including, for
instance, the sales budget, the production budget, the direct materials budget,
the direct labor budget, the overhead budget, and the S&A expense budget. The
individual operating budgets are then used to create the pro forma (or budgeted)
income statement.
, Section B, Topic 5—Annual Profit Plan and Supporting Schedules 199
LOS
Sales Budget
§1.B.5.b
An accurate sales forecast is needed to create the sales budget. A sales forecast is a
subjective estimate of the entity’s future sales for the upcoming period. Without an
accurate sales forecast, all other budget elements will be inaccurate. Forecasters con-
sider historical trends for sales, but also take into consideration economic and indus-
try conditions and indicators, competitors’ actions, rising costs, policies on pricing
and extending credit, the amount of advertising and marketing expenditures, the
number of unfilled back orders, and sales in the sales pipeline (unsigned prospects).
Sales forecasts should be prepared using statistical analysis techniques such as
LOS
§1.B.5.c regression analysis and rely on sales managers’ knowledge about their market and
customer needs. Once a company has determined its forecasted sales level, based on
its long- and short-term objectives, it forms a sales budget to accomplish its goals.
The two key components of the sales budget are the projected number of sales units
and the projected selling prices for the upcoming periods.
For example: Figure 1B-30 shows the sales budget of Robin Manufacturing
Company for the third quarter.
Figure 1B-30 Sales Budget
Robin Manufacturing Company Sales Budget
for the Quarter Ended September 30, Year 1
July August September Quarter Ref #
Sales in units 70,000 72,000 77,000 219,000 1
Selling price per unit $110.80 $110.80 $112.00 (varies)
Total sales $7,756,000 $7,977,600 $8,624,000 $24,357,600 2
It is important to note that the sales budget drives the operating budget because
LOS
§1.B.5.a it impacts how many units will need to be produced (production costs), as well as
the selling and administrative expenses needed to achieve those forecasted sales.
The development of the sales budget is extremely challenging because there
are hardly any one-product companies. The real problem is that there may be so
many products that it’s not practical to develop forecasts by individual products.
Instead, the forecasts are likely to be done at the level of product categories and then
broken down into sales of individual products. If sales budgets are to be prepared
at a grassroots level (such as sales territory), then there must be a reasonable way
to eliminate over-/under-optimism from the budgets prior to rolling them up to
higher levels of summation. Because the elapsed time to prepare the budget may be
very long, and knowing that problems in the sales budgets trickle down to all the
subsequent budget components, a company cannot afford to get to the pro forma
income statement and discover that the forecasted sales level does not produce a
satisfactory net income amount. A way to prevent this from happening is to project
either contribution margin or gross profit using rules of thumb while preparing the
sales budget. If the result looks likely to be unsatisfactory, determining other means
to improve sales or to reduce costs must be considered.
