Chapter 7

7 - 1©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Chapter 7

The Master Budget

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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Objective 1

Explain the major features

and advantages of a

master budget.

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Advantages of Budgets

Goals and Objectives

Budgets

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Compels managersto think ahead

Aids managers in coordinating their efforts

Provides definite expectations that are the best framework to evaluate performance

Advantages of Budgets

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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.

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Capital Budget

Long-range plans…

are coordinated with capital budgets,which detail the planned expendituresfor facilities, equipment, new products,and other long-term investments.

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Master Budget…

summarizes theplanned activitiesof all subunits ofan organization.

Sales

Production

Distribution

Finance

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Operating Budget

Financial Budget

Master Budget

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Objective 2

Follow the principal steps in

preparing a master budget.

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Master Budget

Sales Budget

Master Budget

Purchases Schedules Costs

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PurchasesBudget____ ________ ________ ________ ________ ____

PurchasesBudget____ ________ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

Operating Budget

Components of Master Budget

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BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

CapitalBudget_____ __________ __________ __________ __________ _____

CapitalBudget_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

Components of Master Budget

FinancialBudget

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Objective 3

Prepare the operating budget

and the supporting schedules.

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Operating Budget

Sales Budget

Purchases Budget

Operating Expenses Budget

Cash collectionsfrom customers

Disbursements for purchases

Disbursements for operating expenses

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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 month’s cash sales plus the previous month’s credit sales.

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Purchases Budget

Budgeted purchases = Desired ending inventory+ Cost of goods sold – Beginning inventory

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Disbursements for Purchases

For example, 50% of the current month’s purchases and 50% of the previous month’s 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 month’s and this month’s wages and commissions plus miscellaneous and rent expenses may be included.

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 completeafter addition of the interest expense,which is computed after the cash budgethas been prepared.

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Budgeted Income Statement

Budgeted income from operationsis often a benchmark for judgingmanagement performance.

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Objective 4

Prepare the financial budget.

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Cash Budget

The cash budget has the following major sections:– total cash available before financing– cash disbursements– minimum cash balance desired– financing requirements– ending cash balance

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Cash Budget

Total cash available before financing =Beginning cash balance + Cash receipts

Cash receipts depend on collections fromcustomers’ accounts receivable and cash salesand on other operating income sources.

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Cash Budget

Cash disbursements for purchases depend onthe credit terms extended by suppliers and thebill-paying habits of the buyer.

Payroll depends on wages, salaries, commission terms, and 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 expensesdepend on contractual terms for installmentpayments, mortgage payments, rents, leases,and miscellaneous items.

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Cash Budget

Management determines the minimumcash balance desired depending on thenature of the business and credit arrangements.

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Cash Budget

Financing requirements depend on howthe total cash available compares withthe total cash needed.

Needs include the disbursements plusthe desired ending cash balance.

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Cash Budget

Ending cash balance= Total cash available before financing– Total disbursements + Cash from financing

The cash from financing can be eitherpositive (borrowing) or negative (repayment).

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Budgeted Balance Sheet

The final step in preparing the master budgetis to construct the budgeted balance sheetthat projects each balance sheet item inaccordance with the business plan asexpressed in the previous schedules.

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Objective 5

Understand the difficulties

of sales forecasting.

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Sales Forecast

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

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Factors to Consider When Forecasting Sales

1 Past patterns of sales2 Estimates made by the sales force3 General economic conditions4 Competitors’ actions

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Factors to Consider When Forecasting Sales

5 Changes in the firm’s prices6 Changes in product mix7 Market research studies8 Advertising and sales promotion plans

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Objective 6

Anticipate possible human

relations problems caused

by budgets.

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Acceptance of the Budget

To fully benefit from budgets, an organization needs the support of all the firm’s employees.

To avoid negative attitudes toward budgets, accountants and top management must demonstrate how budgets can help each manager and employee achieve better results.

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Acceptance of the Budget

Another problem that can negate the benefitsof budgeting arises if budgets stress one setof performance goals, but employees andmanagers are rewarded for differentperformance 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.

This involvement is usually called participative budgeting.

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Objective 7

Use a spreadsheet to develop

a budget.

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Software

Spreadsheet software for personal computersis a powerful and flexible tool for budgeting.

Sensitivity analysis is the systematic varyingof budget data input to determine the effectsof each change on the budget.

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Summary

Understand the importance

of budgeting to managers.

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Importance of Budgets to Managers

The budgetary process compels managers tothink and to prepare for changing conditions.

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Importance of Budgets to Managers

Budgets are aids in planning, communicating, settingstandards of performance, motivating personneltoward goals, measuring results, and directingattention to problem areas that need investigation.

The End

Chapter 7

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