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Week8 TheMasterBudget
Week8 TheMasterBudget
Week8 TheMasterBudget
Chapter 7
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7-1
Advantages of Budgets
Budgets
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Advantages of Budgets
Compels managers to think ahead
Provides definite expectations that are the best framework to evaluate performance Aids managers in coordinating their efforts
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Types of Budgets
Strategic plan Long-range plan
Capital budget
Master budget
Continuous budget
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7-4
Strategic Plan
The most forward-looking budget is the strategic plan, which sets the overall goals and objectives of the organization.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Master Budget
Sales The master budget summarizes the planned activities of all subunits of an organization. Production Distribution Finance
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Continuous Budget
Rolling budgets...
are a common form of master budgets that add a month in the future as the month just ended is dropped.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Operating budget
Financial/Cash budget
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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1. Basic data a. Sales budget b. Cash collections from customers c. Purchases budget d. Disbursements for purchases e. Operating expense budget f. Disbursements for operating expenses
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7 - 11
2. Operating budget
3. Financial/Cash budget
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Operating Budget
Sales budget Purchases budget Operating expenses budget Cash collections from customers Disbursements for purchases Disbursements for operating expenses
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Purchases Budget
Beginning inventory + Budgeted purchases Cost of goods sold = Desired ending inventory
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Insurance
Salaries
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Financial/Cash Budget
Available cash balance = Beginning cash balance Minimum cash balance desired. Cash receipts depend on collections from customers accounts receivable, cash sales, and on other operating income sources.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Financial/Cash Budget
Cash disbursements for 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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Financial/Cash Budget
Disbursements for some costs and expenses depend on contractual terms for instalment payments, mortgage payments, rents, leases, and miscellaneous items.
Other disbursements include outlays for fixed assets, long-term investments, dividends, and the like.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7 - 26
Financial/Cash Budget
Management determines the minimum cash balance desired depending on the nature of the business and credit arrangements.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Financial/Cash Budget
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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Financial/Cash Budget
Beginning cash balance + Receipts Disbursements + Cash from financing = Ending cash balance
The cash from financing can be either positive (borrowing) or negative (repayment).
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The final step in preparing the master budget is 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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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Another problem that can negate the benefits of budgeting arises if budgets stress one set of performance goals, but employees and managers are rewarded for different performance measures.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.]
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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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