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The Master BudgetThe Master Budget

2

JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP

MODULE B, B.COM, BBA, MBA & PIPFA.MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752

R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.KARACHI, PAKISTAN.

3

Advantages of BudgetsAdvantages of Budgets

BudgetsBudgets Goals and Goals and objectivesobjectives

A budget allows systematic ratherA budget allows systematic ratherthan chaotic reaction to change.than chaotic reaction to change.

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Advantages of BudgetsAdvantages of Budgets

Provides definiteProvides definiteexpectations thatexpectations that

are the best frameworkare the best frameworkto evaluate performanceto evaluate performance

Aids managers inAids managers incoordinating their effortscoordinating their efforts

CompelsCompelsmanagersmanagers

to thinkto thinkaheadahead

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Types of BudgetsTypes of Budgets

Strategic planStrategic plan Long-range planLong-range plan

Capital budgetCapital budget Master budgetMaster budget

Continuous budget Continuous budget

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Strategic PlanStrategic Plan

The most forward-looking budget is theThe most forward-looking budget is thestrategic plan, which sets the overallstrategic plan, which sets the overall

goals and objectives of the organization.goals and objectives of the organization.

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Long-Range PlanLong-Range Plan

The strategic plan leads to long-rangeThe strategic plan leads to long-rangeplanning, which producesplanning, which produces

forecasted financial statementsforecasted financial statementsfor five- to ten-year periods.for five- to ten-year periods.

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Capital BudgetCapital Budget

Long-range plans…Long-range plans…

are coordinated with capital budgets,are coordinated with capital budgets,which detail the planned expenditureswhich detail the planned expendituresfor facilities, equipment, new products,for facilities, equipment, new products,

and other long-term investments.and other long-term investments.

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Master BudgetMaster Budget

SalesSales

ProductionProduction

DistributionDistribution

FinanceFinance

The master budgetThe master budget

summarizes thesummarizes the

planned activitiesplanned activities

of all subunits ofof all subunits of

an organization.an organization.

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Continuous BudgetContinuous Budget

Rolling budgets...Rolling budgets...

are a common form ofare a common form ofmaster budgets that master budgets that add a month in the add a month in the future as the month future as the month

just ended is dropped.just ended is dropped.

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Operating budgetOperating budget

Financial budgetFinancial budget

Components of Master Components of Master BudgetBudget

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Steps in Preparing theSteps in Preparing theMaster BudgetMaster Budget

1. Basic data1. Basic dataa.a. Sales budgetSales budgetb.b. Cash collections from customersCash collections from customersc.c. Purchases budgetPurchases budgetd.d. Disbursements for purchasesDisbursements for purchasese.e. Operating expense budgetOperating expense budgetf.f. Disbursements for operating expensesDisbursements for operating expenses

The principal steps in preparingThe principal steps in preparingthe master budget are:the master budget are:

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Steps in Preparing theSteps in Preparing theMaster BudgetMaster Budget

1. Basic data1. Basic data

2. Operating budget2. Operating budget

3. Financial budget3. Financial budget

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Operating BudgetOperating Budget

SalesSalesbudgetbudget

Cash collectionsCash collectionsfrom customersfrom customers

DisbursementsDisbursementsfor purchasesfor purchases

Disbursements forDisbursements foroperating expensesoperating expenses

PurchasesPurchasesbudgetbudget

Operating expensesOperating expensesbudgetbudget

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Cash CollectionsCash Collections

It is easiest to prepare budgetedIt is easiest to prepare budgetedcash collections at the samecash collections at the same

time as the sales budget.time as the sales budget.

Cash collections include the currentCash collections include the currentmonth’s cash sales plus themonth’s cash sales plus the

previous month’s credit sales.previous month’s credit sales.

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JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP

MODULE B, B.COM, BBA, MBA & PIPFA.MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752

R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.KARACHI, PAKISTAN.

17

Purchases BudgetPurchases Budget

Budgeted purchasesBudgeted purchases= Desired ending inventory= Desired ending inventory

+ Cost of goods sold+ Cost of goods sold– – Beginning inventoryBeginning inventory

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Disbursements for Disbursements for PurchasesPurchases

For example, 50% of the current month’sFor example, 50% of the current month’spurchases and 50% of the previouspurchases and 50% of the previousmonth’s purchases may be included.month’s purchases may be included.

The total disbursements are thenThe total disbursements are thenused in preparing the cash budget.used in preparing the cash budget.

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Operating Expense BudgetOperating Expense Budget

The budgeting of operating expensesThe budgeting of operating expensesdepends on several factors.depends on several factors.

Month-to-month changes in salesMonth-to-month changes in salesvolume and other cost-driver activitiesvolume and other cost-driver activities

directly influence many operating expenses.directly influence many operating expenses.

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Operating Expense BudgetOperating Expense Budget

Expenses driven by sales volumeExpenses driven by sales volumeinclude sales commissionsinclude sales commissions

and many delivery expenses.and many delivery expenses.

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Operating Expense BudgetOperating Expense Budget

Other expenses are not influenced by salesOther expenses are not influenced by salesor other cost-driver activity and are regardedor other cost-driver activity and are regardedas fixed, within appropriate relevant ranges.as fixed, within appropriate relevant ranges.

RentRent

InsuranceInsurance

DepreciationDepreciation

SalariesSalaries

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Operating Expense Operating Expense DisbursementsDisbursements

Disbursements for operating expenses areDisbursements for operating expenses arebased on the operating expense budget.based on the operating expense budget.

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Operating Expense Operating Expense DisbursementsDisbursements

For example, 50% of last month’sFor example, 50% of last month’sand this month’s wages andand this month’s wages and

commissions plus miscellaneouscommissions plus miscellaneousand rent expenses may be included.and rent expenses may be included.

The total of these disbursements is thenThe total of these disbursements is thenused in preparing the cash budget.used in preparing the cash budget.

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Budgeted Income Budgeted Income StatementStatement

The income statement will be completeThe income statement will be completeafter addition of the interest expense,after addition of the interest expense,

which is computed after the cashwhich is computed after the cashbudget has been prepared.budget has been prepared.

Budgeted income from operationsBudgeted income from operationsis often a benchmark for judgingis often a benchmark for judging

management performance.management performance.

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Cash BudgetCash Budget

The cash budget has the following major sections:The cash budget has the following major sections: available cash balanceavailable cash balance cash receipts disbursementscash receipts disbursements cash needed from (or used for) financingcash needed from (or used for) financing ending cash balanceending cash balance

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Cash BudgetCash Budget

Available cash balanceAvailable cash balance= Beginning cash balance= Beginning cash balance

– – Minimum cash balance desired.Minimum cash balance desired.

Cash receipts depend on collections fromCash receipts depend on collections fromcustomers’ accounts receivable, cash sales,customers’ accounts receivable, cash sales,

and on other operating income sources.and on other operating income sources.

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Cash BudgetCash Budget

Cash disbursements for purchases dependCash disbursements for purchases dependon the credit terms extended by supplierson the credit terms extended by suppliers

and the bill-paying habits of the buyer.and the bill-paying habits of the buyer.

Payroll depends on wage, salary, and Payroll depends on wage, salary, and commission terms and on payroll dates.commission terms and on payroll dates.

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Cash BudgetCash Budget

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

dividends, and the like.dividends, and the like.

Disbursements for some costs and expensesDisbursements for some costs and expensesdepend on contractual terms for installmentdepend on contractual terms for installment

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

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Cash BudgetCash Budget

Management determines the minimumManagement determines the minimumcash balance desired dependingcash balance desired depending

on the nature of the businesson the nature of the businessand credit arrangements.and credit arrangements.

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Cash BudgetCash Budget

Financing requirements depend on howFinancing requirements depend on howthe total cash available comparesthe total cash available compares

with the total cash needed.with the total cash needed.

Needs include the disbursements plusNeeds include the disbursements plusthe desired ending cash balance.the desired ending cash balance.

31

JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP

MODULE B, B.COM, BBA, MBA & PIPFA.MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752

R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.KARACHI, PAKISTAN.

32

Cash BudgetCash Budget

Ending cash balanceEnding cash balance= Beginning cash balance= Beginning cash balance

+ Receipts – Disbursements+ Receipts – Disbursements+ Cash from financing+ Cash from financing

The cash from financing can beThe cash from financing can beeither positive (borrowing)either positive (borrowing)or negative (repayment).or negative (repayment).

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Budgeted Balance SheetBudgeted Balance Sheet

The final step in preparing the master budgetThe final step in preparing the master budgetis to construct the budgeted balance sheetis to construct the budgeted balance sheet

that projects each balance sheet item inthat projects each balance sheet item inaccordance with the business plan.accordance with the business plan.

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Sales ForecastSales Forecast

A sales forecast is a prediction of salesA sales forecast is a prediction of salesunder a given set of conditions.under a given set of conditions.

Sales forecasts are usually prepared underSales forecasts are usually prepared underthe direction of the top sales executive.the direction of the top sales executive.

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Factors to Consider When Factors to Consider When Forecasting SalesForecasting Sales

Competitors’ actionsCompetitors’ actions

Past patterns of salesPast patterns of sales

Estimates made by the sales forceEstimates made by the sales force

General economic conditionsGeneral economic conditions

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Factors to Consider When Factors to Consider When Forecasting SalesForecasting Sales

Advertising and sales promotion plansAdvertising and sales promotion plans

Changes in the firm’s pricesChanges in the firm’s prices

Changes in product mixChanges in product mix

Market research studiesMarket research studies

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Getting Employees to Getting Employees to AcceptAccept the Budget the Budget

To fully benefit from budgets, anTo fully benefit from budgets, anorganization needs the supportorganization needs the support

of all the firm’s employees.of all the firm’s employees.

The attitude of top management willThe attitude of top management willheavily influence lower-levelheavily influence lower-level

workers’ and managers’ attitudes.workers’ and managers’ attitudes.

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Getting Employees to Getting Employees to AcceptAccept the Budget the Budget

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

of performance goals, but employees andof performance goals, but employees andmanagers are rewarded for differentmanagers are rewarded for different

performance measures.performance measures.

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Participative BudgetingParticipative Budgeting

Budgets created with the active participationBudgets created with the active participationof all affected employees are generally moreof all affected employees are generally more

effective than budgets imposed on subordinates.effective than budgets imposed on subordinates.

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Functional BudgetingFunctional Budgeting

The budgeting focus is on preparingThe budgeting focus is on preparingbudgets for various functionsbudgets for various functionssuch as production, selling,such as production, selling,and administrative support.and administrative support.

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Activity-Based Master Activity-Based Master BudgetsBudgets

Emphasizes the planning and control Emphasizes the planning and control purpose of cost management.purpose of cost management.

Focus is on estimating the demand Focus is on estimating the demand for each activity’s output as measured by its for each activity’s output as measured by its cost driver and consumption of resources. cost driver and consumption of resources.

Considered more useful for controlling Considered more useful for controlling waste & improving efficiency.waste & improving efficiency.

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ExerciseExercise

Question:Question:

Many non-profit organisations use budgets Many non-profit organisations use budgets primarily to limit spending. Why does this limit primarily to limit spending. Why does this limit the effectiveness of budgets? the effectiveness of budgets?

[This tests your knowledge of the many roles [This tests your knowledge of the many roles of budgets.]of budgets.]

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ExerciseExercise

- Helps managers to plan ahead.Helps managers to plan ahead.- Provides definite expectations that are the best Provides definite expectations that are the best

framework to evaluate performanceframework to evaluate performance- Aids managers in coordinating their effortsAids managers in coordinating their efforts- A decision tool. It helps managers project the A decision tool. It helps managers project the

results of their decisions, thereby aiding them results of their decisions, thereby aiding them in making the right decisions. in making the right decisions.

-- Provides a base for adapting to change. Provides a base for adapting to change.

44

JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP

MODULE B, B.COM, BBA, MBA & PIPFA.MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752

R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.KARACHI, PAKISTAN.