Week8-TheMasterBudget

7/28/2019 Week8-TheMasterBudget

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 7 - 1

The Master Budget

Chapter 7


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Advantages of Budgets

Budgets

Goals and

objectives

A budget allows systematic ratherthan chaotic reaction to change.


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Advantages of Budgets

Provides definite

expectations that

are the best framework

to evaluate performance

Aids managers in

coordinating their efforts

Compels

managers

to think

ahead


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Types of Budgets

Strategic plan

Long

-

range plan

Capital budget

Master budget

Continuous budget


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Strategic Plan

The most forward

-

looking budget is the

strategic plan, which sets the overall

goals and objectives of the organization.


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Long-Range Plan

The strategic plan leads to long

-

range

planning, which produces

forecasted financial statements

for five

-

to ten

-

year periods.


7/382005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 7 - 7

Capital Budget

Long-range plans

are coordinated with capital budgets,

which detail the planned expenditures

for facilities, equipment, new products,

and other long-term investments.



Master Budget

Sales

Production

Distribution

Finance

The master budget

summarizes the

planned activities

of all subunits of

an organization.



Continuous Budget

Rolling budgets...

are a common form of

master budgets thatadd a month in the

future as the month

just ended is dropped.



Operating budget

Financial/Cash

budget

Components of Master Budget



Steps in Preparing the

Master Budget

1. Basic data

a. Sales budget

b. Cash collections from customers

c. Purchases budgetd. Disbursements for purchases

e. Operating expense budget

f. Disbursements for operating expenses

The principal steps in preparing

the master budget are:


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Steps in Preparing the

Master Budget

1. Basic data

2. Operating budget

3. Financial/Cash budget


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Operating Budget

Sales

budget

Cash collections

from customers

Disbursements

for purchases

Disbursements for

operating expenses

Purchases

budget

Operating expenses

budget


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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

Beginning inventory +

Budgeted purchases

Cost of goods sold

= Desired ending inventory


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Disbursements for Purchases

For example, 50% of the current months

purchases and 50% of the previous

months purchases may be included.

The total disbursements are then

used in preparing the cash budget.


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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-driver activities

directly influence many operating expenses.


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Expenses driven by sales 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


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Operating Expense

Disbursements

Disbursements for operating expenses are

based on the operating expense budget.


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Operating Expense

Disbursements

For example, 50% of last months

and this months wages and

commissions plus miscellaneousand rent expenses may be included.

The total of these disbursements is thenused 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 financial/cash budget has been prepared.

Budgeted income from operationsis often a benchmark for judging

management performance.


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Financial/Cash Budget

The cash budget has the following major

sections:available cash balance

cash receipts disbursements

cash needed from (or used for) financing

ending cash balance


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Available cash balance

= Beginning cash balance

Minimum cash balance desired.

Cash receiptsdepend on collections from

customers accounts receivable, cash sales,

and on other operating income sources.


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

dividends, and the like.

Disbursements for some costs and expenses

depend on contractual terms for instalment

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


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Management determines the minimum

cash balance desired depending

on the nature of the business

and credit arrangements.


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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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Beginning cash balance

+ ReceiptsDisbursements

+ Cash from financing= Ending cash balance

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 budgetis to construct the budgeted balance sheet

that projects each balance sheet item in

accordance with the business plan.


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Sales Forecast

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.


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Factors to Consider When

Forecasting Sales

Competitors actions

Past patterns of sales

Estimates made by the sales force

General economic conditions


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Factors to Consider When

Forecasting Sales

Advertising and sales promotion plans

Changes in the firms prices

Changes in product mix

Market research studies


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Getting Employees to Accept

the Budget

To fully benefit from budgets, an

organization needs the support

of all the firms employees.

The attitude of top management will

heavily influence lower-levelworkers and managers attitudes.


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Getting Employees to Accept

the Budget

Another problem that can negate the benefitsof budgeting arises if budgets stress one set

ofperformance goals, but employees and

managers are rewarded for different

performance measures.


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Participative Budgeting

Budgets created with the active

participation of all affected employees

are generally more effective than

budgets imposed on subordinates.


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Exercise

Question:

Many non-profit organisations use budgets

primarily to limit spending. Why does this limit

the effectiveness of budgets?

[This tests your knowledge of the many roles

of budgets.]


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Exercise

- Helps managers to plan ahead.

- Provides definite expectations that are the

best framework to evaluate performance- Aids managers in coordinating their efforts

- A decision tool. It helps managers project

the results of their decisions, thereby aiding

them in making the right decisions.- Provides a base for adapting to change.

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