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Master Budget Notes 3/9/2010 12:56:00 PM

Budgeting involves planning for the various revenue producing and cost generating

activities of an organization

The important of budgeting is emphasized by an old saying, Failing to plan, is like

planning to fail.

Budgeting is essentially financial planning, or planning for financial performance.Types of Budgets

Appropriation Budgeto A maximum amount is established for certain expenditures based on

management judgment

o Discretionary costso Example

Employee training, advertising, sales promotion and research anddevelopment

Flexible Budgeto A static amount

Is established for fixed costs and a variable rate Is determined per activity measure for variable costs

y=mx+bo The static amount

Includes both discretionary and committed costs while the flexible part Includes engineered costs per x value

Capital Budgeto Decisions concerning potential investments are made using discounted cash

flow techniqueso Committed costs

Master Budgeto A comprehensive plan is developed for all revenue and expenditureso Discretionary, engineered and committed costs

The Purposes and Benefits of the Master Budget

Integrates and Coordinateso Translates the organizations objectives into action steps

Communicates and Motivateso

Communicates to employees and managers the expectations of topmanagement

Promotes Continuous Improvement Guides Performance

o Culminates in the preparation of a set of pro-forma financial statements Facilitates Evaluation and Control

o Comparison of budget to actual results

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Limitations and Problems

Uncertaintyo Based on sales forecasts and other assumptions which are difficult to predict

Behavior Biaso Should encourage a high level of performance and efficiency, but at the same

time, it should be fair and obtainable Costs

o Time, effort, computer infrastructureThe Sales Budget

Forecasted Sales VolumePurchases/Inventory Budget

Costs of Goods Sold(COGS) and budgeted ending inventory are generally a functionof slaves and you will solves for purchases

Beginning Inventory Desired Ending Inventory

+ Purchases + COGS

- Costs of Goods Sold - Beginning Inventory

= Ending Inventory =Purchases

Selling and Administrative Expense Budgets

These budgets include all the planned expenditures for selling and generaladministrative activities

Selling expenses are often a function of sales (commission) Many of the expense included in the administrative budget are considereddiscretionary and are a likely place for spending cuts Managers must be careful not to focus solely on short-term affects when making cuts

in these areas

Budgeted Income Statement

Profit = Total RevenueVariable CostFixed CostCash Receipts/Collecting Budget

Cash sales for the budget periodCash Payments Budget

Expenses paid during the budget periodo Salary, commission, rent, insurance, etc.

Eliminate non-cash expenses such as depreciation and accrued interestCash Budget

Beginning Cash Balance

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+Cash Collections

Cash Available

-Cash Payments

=Ending Cash Balance before financing

-Minimum c

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