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The MasterBudget

12

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Budgeting: The Overall Plan• Every organization has a goal (or a set of goals)

• Management develops plans to achieve these goals

• What type of product to produce• What level of cost and quality• What level of price• What degree of advertising• Inventory and credit policies Master

Budget

Supporting Documents

Budget• Formal quantitative expression of

management's plans• What things are expected to look like

for the upcoming period • Allows for systematic rather than

chaotic reaction to change

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Types of Budgets

Strategic Plan• Sets overall goals and objectives for the organization

Capital Budget• Long range plan for investing in and financing long term assets

such as buildings and equipment

Master Budget• Yearly projection of revenues, costs and volumes including

operating schedules and financial statementsOperating Budget Financial BudgetSales budget Cash budgetPurchases budget Budgeted income statementCost of goods sold budget Budgeted balance sheetOperating expense budget Capital budget

Continuous Budgets (Rolling Budgets)• Add one month in the future as the current month is completed

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Master Budget for A Nonmanufacturing Company Sales budget

Purchases budget

Cost of goods soldbudget

Operating expensebudget

BudgetedIncome Statement

BudgetedBalance Sheet

Cashbudget

Ending inventorybudget

Capitalbudgets

Start

OperatingBudget

Financial Budget

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Advantages of Budgets

Planning• Compels managers to think ahead• Budgeting makes planning an explicit management

responsibility

Framework for Judging Performance• Provides definite expectations that are the best framework

for judging subsequent performance• Benchmark to evaluate current results against

Communication and Coordination• Budgets inform managers of which is expected of them

• "Top down" - Management clarifies goals & objectives• "Bottom up" - Managers' plans for achieving objectives

• Aids managers in coordinating their efforts, so that the objectives of the organization as a whole match the objectives of its parts

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Making A Budget Work: Anticipating Human Behaviour

• Successful budgeting process requires support from all employees• Lower-level workers and managers' attitudes towards the budget

will be heavily influenced by the attitude of top management• Use caution when using budget to evaluate subordinates

• Nobody likes someone to check on their performance• Avoid concentrating on managers' failings

• Accountant must show how the budget can help everyone achieve better results

• Need coordination between what goals are stressed in the budget and what dimensions managers are rewarded on

• Everyone must understand and accept the budget as a tool• Budgets which allow managers and employees to participate in the

establishment of targets are usually more effective than budgets which are imposed