Chapter 13

The Master Budget

Cost AccountingTraditions and Innovations

Barfield, Raiborn, Kinney

Learning Objectives (1 of 2)

• Explain why budgeting is important

• Describe how strategic and tactical planning are related to budgeting

• Identify the starting point of a master budget

• Prepare various master budget schedules

Learning Objectives (2 of 2)

• Explain how the master budget schedules relate to one another

• Clarify why the cash budget is important in the master budgeting process

• (Appendix) Explain how a budget manual facilitates the budgeting process

Management

Planning is the cornerstone of effective management

Terms

• Budgeting - Formalizes plans and translates qualitative narratives into a documented, quantitative format

• Budget - Expresses a commitment to planned activities and resource acquisition and use

Budgets

• Communicate objectives, constraints, and expectations

• Provide financial predictions

• Identify potential problems

• Determine resource allocation and constraints

• Permit control through budget-to-actual comparisons

The Planning Process

Strategic

Planning

Tactical

Planning

Budget

Strategic Planning

• Long-term (5 to 10 years)

• Top-level management

• Long-range goals, strategies, and policies

• Foundation for short-term planning

• Identify and gather information on key variables, both internal and external

External Key Variables• Competitor actions• U.S. market conditions• U.S. political/regulatory climate• Emerging technology issues• Consumer trends and attitudes• International market conditions• Demographics• International political/regulatory climate

Tactical Plans

• Short-term (1 to 18 months)

• Top and mid-management

• Specific objectives and means to achieve strategic plans

• Basis against which results can be measured

Budgeting

• Short-term

• Top, mid, and operational management

• Usable guidelines to implement strategic and tactical plans

• Allocates resources

• Standard against which performance can be measured

The Control Phase

• Actual-to-budget comparisons

• Determining and investigating variances

• Corrective action

• Feedback to operating managers

Budget

The Balanced Scorecard

• Financial performance• Customer satisfaction• Innovation and

learning• Key performance

indicators

• Measures– Short-term

performance– Indicators of future

success

The Master Budget

Operating Budget Financial BudgetSales BudgetProduction BudgetPurchases BudgetDirect Labor BudgetOverhead Budget

Selling & Administrative Budget

Cash BudgetCapital Expenditures

BudgetBalance SheetIncome Statement

Statement of Cash Flows

Statement of Retained Earnings

The Operating Budget

Sales Budget

Sales Forecast

• Ask sales personnel

• Extrapolate past trends

• Use market research

• Employ statistical models and simulation

SalesForecast

The Operating Budget

Sales Budget

Production Budget

The Operating Budget

Sales Budget

Production Budget

Overhead Budget

Direct Labor Budget

Purchases Budget

The Operating Budget

Sales Budget

Production Budget

Overhead Budget

Direct Labor Budget

Purchases Budget

Admin Expense Budget

Selling Expense Budget

The Financial Budget

Operating Budget

The Financial Budget

Operating Budget

Cash Budget

Capital Budget

The Financial Budget

Operating Budget

Cash Budget

Capital BudgetIncome

Statement

The Financial Budget

Operating Budget

Cash Budget

Capital BudgetIncome

Statement

Statement of Retained Earnings

The Financial Budget

Operating Budget

Cash Budget

Capital BudgetIncome

Statement

Statement of Retained Earnings Balance Sheet

The Financial Budget

Operating Budget

Cash Budget

Capital BudgetIncome

Statement

Statement of Retained Earnings Balance Sheet

Statement of Cash Flows

Budgets Provide

• Guide to align activities and resources with organizational goals

• Vehicle to promote employee participation, cooperation, and departmental coordination

• Tool to enhance planning, controlling, problem solving, and evaluating

Budget

Budgeting Provides

• Basis to sharpen responsiveness to internal and external factors

• Model to view future performance and consider alternative measures

Budget

Budgeting Terms

• Continuous budgeting – 12-month rolling budget

Budgeting Terms

• Continuous budgeting

• Budget slack– intentional underestimation of revenue– intentional overestimation of expenses– overcome by linking actual performance to

budget through a bonus system

Budgeting Terms

• Continuous budgeting

• Budget slack

• Participatory budget– developed by top management and operating

personnel

Budgeting Terms

• Continuous budgeting

• Budget slack

• Participatory budget

• Imposed budgets– developed by top management– imposed on operating personnel

Activity Budget

• Map line items in budget to list of activities

• Raise awareness of non-value-added activities

• Question and reduce non-value-added costs

Budget

Budget Manual

• Statements of budgetary purpose and its desired results

• Listing of specific budgetary activities to be performed

• Calendar of scheduled budgetary activities

• Sample of budgetary forms

• Original, revised, and approved budgets

Questions

• How are strategic and tactical planning related to budgeting?

• In what order are the master budget schedules prepared?

• Why is the cash budget important in the master budgeting process?