You are the new Budget Manager for ABC Construction. ABC builds homes for middle

Question

You are the new Budget Manager for ABC Construction. ABC builds homes for middle market customers ($300,000 to $700,000 per house selling price) in several company-owned developments. You report to the CFO, and you are the first budget manager for the company.

Task

The CFO has asked you to list for him the information you will head to prepare a Master Budget for 2017, and related cash budget and cash flow projections and projected financial statements for 2017.

This set of budgets and projections was required for upcoming 2017 by the company’s banker who intends to loan up to $20 million in secured construction financing to ABC.

ABC is a sensitive, smaller family company owned by Jones Family members and does not like to provide information to outsiders. Accordingly, the CFO wants your request for information to explain why the various data are required for you to perform this task.

Please prepare a memo to CFO Martin that he can use to clear your requests with the Jones family executive/owners.

Explanation / Answer

Following is an exemplary list of information required to prepare a master budget:

1. For sales budget

Budgeted sales units

Selling price per unit

2. For schedule of expected collections

Beginning accounts receivable

Percentages of cash and credit sales

Patern of payments expected to received from the customers

3. For materials purchases budget

List of materials required for the construction along with the information about the quantity of material is required to complete one unit

Beging balances of raw materials

Desired quantity of ending raw materials inventory

Purchase price per unit of raw materials

4. For schedule of payment for raw materials purchases

Beginning accounts payable for raw materials purchases

Pattern of payment to be made to the suppliers

5. For schedule of payments for labor

Number of hours required to be worked to complete one unit

Labor rate per hour

Pattern of payment for wages

5. For schedule of payments for operating expenses

Salaries to be paid to selling and administrative employees

Pattern of payment of salaries

Information about other operating expenses such as advertisements, utilities, etc.

6. Cost of goods sold budget

In addition to direct material and direct labor required to complete each unit information on overhead costs applied to each unit will also be required to determine the cost of each unit being sold

7. For cash budget

Beginning cash balance

Financing available

Desired ending cash balance

8. For budgeted income statement

In addition to sales and cost of goods sold information about the non-cash operating expenses would also be required to compute the budgeted income

9. For budgeted balance sheet

Beginning balances of each class of assets and liabiities and owner's equity would be required

A master budget is a complete business plan for future periods. In order to prepare a master budget a gamut of information is required depending upon what the type of business in which the entity is engaged. For a construction company, the information required to prepare a master budget can be much much more than what is mentioned above.

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