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Master Budgetingand

Responsibility Accounting

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Budget definedThe quantitative expression of a proposed

plan of action by management for a specified period, and

An aid to coordinating what needs to be done to implement that plan

May include both financial and non-financial data

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The Ongoing Budget Process:1. Managers and accountants plan the

performance of the company, taking into account past performance and anticipated future changes

2. Senior managers distribute a set of goals against which actual results will be compared

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The Ongoing Budget Process:3. Accountants help managers investigate

deviations from budget. Corrective action occurs at this point

4. Managers and accountants assess market feedback, changed conditions, and their own experiences as plans are laid for the next budget period

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Strategy, Planning and Budgets, Illustrated

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Advantages of BudgetsProvides a framework for judging

performanceMotivates managers and other employeesPromotes coordination and communication

among subunits within the company

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Components of Master BudgetsOperating Budget – building blocks leading to

the creation of the Budgeted Income Statement

Financial Budget – building blocks based on the Operating Budget that lead to the creation of the Budgeted Balance Sheet and the Budgeted Statement of Cash Flows

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Basic Operating Budget Steps1. Prepare the Revenues Budget2. Prepare the Production Budget (in Units)3. Prepare the Direct Materials Usage Budget

and Direct Materials Purchases Budget4. Prepare the Direct Manufacturing Labor

Budget

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Basic Operating Budget Steps5. Prepare the Manufacturing Overhead Costs

Budget6. Prepare the Ending Inventories Budget7. Prepare the Cost of Goods Sold Budget8. Prepare the Operating Expense (Period

Cost) Budget9. Prepare the Budgeted Income Statement

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Basic Financial Budget StepsBased on the Operating Budgets:1. Prepare the Capital Expenditures Budget2. Prepare the Cash Budget3. Prepare the Budgeted Balance Sheet4. Prepare the Budgeted Statement of Cash

Flows

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SampleMasterBudget,Illustrated

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Other Budgeting IssuesFinancial-planning software may be

employed to conduct sensitivity (“what-if”) analysis to assist in the budgetary process

Kaizen Budgeting – incorporating continuous improvement factors in the budgeting process

Activity-Based Budgeting – incorporating Activity-Based Costing in the budgetary process

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Kaizen Budgeting, Illustrated

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Budgeting and the Organization:Responsibility AccountingResponsibility Center – a part, segment, or

subunit of a organization whose manager is accountable for a specified set of activities

Responsibility Accounting – a system that measures the plans, budgets, actions and actual results of each Responsibility Center

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Types of Responsibility Centers1. Cost – accountable for costs only2. Revenue – accountable for revenues only3. Profit – accountable for revenues & costs4. Investment – accountable for investments,

revenues, and costs

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Budgets and FeedbackBudgets offer feedback in the form of

variances: actual results deviate from budgeted targets

Variances provide managers withEarly warning of problemsA basis for performance evaluationA basis for strategy evaluation

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ControllabilityControllability is the degree of influence that

a manager has over costs, revenues, or related items for which he is being held responsible

Responsibility Accounting focuses on information sharing, not in laying blame on a particular manager

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Budgeting and Human BehaviorThe budgeting process may be abused both

by superiors and subordinates, leading to negative outcomes

Superiors may dominate the budget process or hold subordinates accountable for events they have no control over

Subordinates may build “budgetary slack” into their budgets

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Budgetary SlackThe practice of underestimating budgeted

revenues, or overestimating budgeted expenses, in an effort to make the resulting budgeted goals (profits) more easily attainable

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