Introduction to Master Budget

7/29/2019 Introduction to Master Budget

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2008 Prentice Hall Business Publishing, Introduction to Management Accounting14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 1

Introduction to Management Accounting

Introduction to Budgets

and Preparing the Master Budget

Chapter 7


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Budgets and the Organization

Budgets

Goals and

objectives

A budget provides a comprehensive financial

overview of planned company operations.

Learning

Objective 1


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Benefits of Budgets

Provide an opportunity to

reevaluate existing activities

and evaluate new ones.

Aid managers in communicating

objectives and coordinating actions

across the organization.

Compel

managers

to think

ahead


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Human Relations Problems

1. Low levels of participation in the budget process andLack of acceptance of responsibility for the final budget.

2. Incentives to lie and cheat in the budget process.3. Difficulties in obtaining accurate sales forecasts.

Learning

Objective 2

Management should seek to createan environment where there is a

true two-way flow of information.


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Potential Problems in Implementing Budgets

Participative budgets are formulated with theactive participation of all affected employees.

Message conveyed by thebudget system may bemisaligned with incentivesprovided by thecompensation system.


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Incentives to Lie and Cheat

Dysfunctional incentiveslead managers to make

poor decisions.

Lying can arise if the budget

process creates incentives to

bias the budget information.

Budgetary Slack (budget padding) is the

overstatement or understatement of budgeted

revenue to create a goal that is easier to achieve.

Learning

Objective 3


7/362008 Prentice Hall Business Publishing, Introduction to Management Accounting14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 7

Sales Forecasting

A sales forecast is a prediction of sales

under a given set of conditions.

Sales forecasts are usually prepared under

the direction of the top sales executive.

Learning

Objective 4

The sales budget is the result of decisions to create

Conditions that will generate a desired level of sales.



Factors to Consider When Forecasting Sales



Types of Budgets

Strategic plan Long-range planning

Capital budget

Master budget

Continuous budget

Learning

Objective 5



Strategic Plan

The most forward-looking budget is the

strategic plan, which sets the overall

goals and objectives of the organization.

The strategic plan leads to long-range

planning, which producesforecasted financial statements

for five- to ten-year periods.



Long-range plans

are coordinated with capital budgets,

which detail the planned expenditures

for facilities, equipment, new products,

and other long-term investments.

Long-range Plans

Master budgets link to both long-range

plans and short-term budgets.



Master Budget

Sales

Production

Distribution

Finance

The master budget

is a detailed and

comprehensive analysis

of the first year of the

long-range plan.

It summarizes the

planned activitiesof all subunits of

an organization.


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Continuous Budget

Rolling budgets...are a common form of

master budgets thatadd a month in the

future as the month

just ended is dropped.


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Operating budget(Profit plan). . . Financial budget. . .

Master Budget

Focuses on the Income

Statement and

supporting schedulesor budgeted expenses.

Focuses on the effects

that the operating budget

and other plans will haveon cash balances.


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Steps in Preparing the Master Budget

1. Basic data

2. Operating budget

3. Financial budget

Learning

Objective 6


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1. Basic dataa. Sales budget

b. Cash collections from customers

c. Purchases and cost-of-goods sold budget

d. Cash disbursements for purchases

e. Operating expense budget

f. Cash disbursements for operating expenses

The principal steps in preparing

the master budget:


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Financial Budget

3. Prepare forecasted financial statements:

b. Capital budgetc. Cash budget

d. Budgeted Balance sheet

Operating Budget

2. Prepare budgeted income statement using basic data in step 1.


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Operating Budget

Sales

budget

Cash collections

from customers

Disbursements

for purchases

Disbursements for

operating expenses

Purchases

budget

Operating expenses

budget

Learning

Objective 7


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Cash Collections

It is easiest to prepare budgeted

cash collections at the same

time as the sales budget.

Cash collections include the current

months cash sales plus the

previous months credit sales.


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Purchases Budget and Cash Disbursements

Budgeted purchases

= Desired ending inventory

+ Cost of goods sold

Beginning inventory

Disbursements could include 50% of the current months

purchases and 50% of the Previous months purchases.


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Operating Expense Budget

The budgeting of operating expenses depends on several factors.

Month-to-month changes in sales volume and other cost-driveractivities directly influence many operating expenses.

Expenses driven bysales volume include

sales commissions and

many delivery expenses.


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Other expenses are not influenced by sales

or other cost-driver activity and are regarded

as fixed, within appropriate relevant ranges.

Rent

Insurance

Depreciation

Salaries

Operating Expense Budget


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Operating Expense Disbursements

Disbursements for operating expenses are

based on the operating expense budget.

Disbursements may include 50% of last months and this months

wages and commissions plus miscellaneous and rent expenses.

The total of these disbursements is then

used in preparing the cash budget.


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Budgeted Income Statement

The income statement will be complete

after addition of the interest expense,

which is computed after the cash

budget has been prepared.

Budgeted income from operations

is often a benchmark for judging

management performance.


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Financial Budget

The Cash budget contains these major sections: available cash balance net cash receipts and disbursementsfinancing

Learning

Objective 8

The cash budget is a statement of plannedcash receipts and disbursements.


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Cash Budget

Available cash balance

= Beginning cash balance

Minimum cash balance desired.

Cash receipts depend on collections from

customers accounts receivable, cash sales,

and on other operating income sources.


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Cash Budget

Cash disbursements for purchases depend

on the credit terms extended by suppliers

and the bill-paying habits of the buyer.

Payroll depends on wage, salary, and

commission terms and on payroll dates.


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Cash Budget

Other disbursements include outlays forfixed assets, long-term investments,

dividends, and the like.

Disbursements for some costs and expenses

depend on contractual terms for installment

payments, mortgage payments, rents,leases, and miscellaneous items.


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Cash Budget

Management determines the minimum

cash balance desired depending

on the nature of the business

and credit arrangements.


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Cash Budget

Financing requirements depend on how

the total cash available compares

with the total cash needed.

Needs include the disbursements plus

the desired ending cash balance.


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Cash Budget

Ending cash balance

= Beginning cash balance

+ Receipts Disbursements

+ Cash from financing

The cash from financing can beeither positive (borrowing)

or negative (repayment).


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Budgeted Balance Sheet

The final step in preparing the master budget

is to construct the budgeted balance sheet

that projects each balance sheet item in

accordance with the business plan.

Management then considers all the major

financial statements as a basis for changing

the course of events.


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Activity-Based Master Budgets

An activity-based budgetary system

emphasizes the planning and controlpurpose of cost management.

Functional budgeting focuses on

preparing budgets for various

functions such as production,

selling, and administrative support.


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Financial Planning Models

Financial models are only as good as the assumptions

and the inputs used to build and manipulate them.

Financial planning models are mathematical models

that can incorporate the effects of alternative

assumptions about sales, costs, or product mix.


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Spreadsheets for Budgeting

Arithmetic errors are virtually nonexistent.

Spreadsheet software for personal computers is

a powerful and flexible tool for budgeting that

can be used to prepare mathematical models.

Financial planning models are mathematical models

that can incorporate the effects of alternative

assumptions about sales, costs, or product mix.

Learning

Objective 9


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End of Chapter 7

The End

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Introduction to Master Budget

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