The Master Budget

Chapter 7
The Master Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 7-1
Objective 1
Explain the major features

and advantages of a
master budget.
Advantages of Budgets
Goals and
Budgets
Objectives
Advantages of Budgets
Compels managers
to think ahead
Aids managers in coordinating

their efforts
Provides definite expectations that are the

best framework to evaluate performance
Types of Budgets
Strategic Plan Long-Range Plan
Capital Budget Master Budget
Continuous Budget
Strategic Plan
 The most forward-looking budget is the
strategic plan, which sets the overall goals
and objectives of the organization.
Long-Range Plan
 The strategic plan leads to long-range
planning, which produces forecasted
financial statements for five- to ten-year
periods.
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.
Master Budget…
Sales
summarizes the Production

planned activities
of all subunits of Distribution
an organization.
Finance
Master Budget
Operating Budget
Financial Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 7 - 10
Objective 2
Follow the principal steps in

preparing a master budget.
Master Budget
Sales Budget
Master Budget
Purchases Schedules Costs
Components of Master Budget
Inventory
Budget
____ ____
____ ____
____ ____
____ ____
____ ____
Sales Purchases Cost of Operating Budgeted

Budget Budget Goods Sold Expenses Income
____ ____ ____ ____ Budget Budget Statement
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
Operating Budget
Components of Master Budget
Cash
Budget
_____ _____
_____ _____
Capital _____ _____
Budget _____ _____
_____ _____ _____ _____
_____ _____ Financial
_____ _____
_____ _____ Budget
_____ _____ Budgeted
Balance
Sheet
_____ _____
_____ _____
_____ _____
_____ _____
_____ _____
Objective 3
Prepare the operating budget

and the supporting schedules.
Operating Budget
Cash collections
Sales Budget from customers
Disbursements
Purchases Budget for purchases
Disbursements
Operating Expenses Budget for operating
expenses
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.
Purchases Budget
Budgeted purchases = Desired ending inventory

+ Cost of goods sold – Beginning inventory
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.
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.
 Expenses driven by sales volume include
sales commissions and many delivery
expenses.
 Other expenses are not influenced by sales
or other cost-driver activity and are
regarded as fixed, within appropriate
relevant ranges.
Rent Depreciation
Insurance Salaries
Operating Expense
Disbursements
 Disbursements for
operating expenses
are based on the
operating expense
budget.
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.
Budgeted Income Statement
The income statement will be complete

after addition of the interest expense,
which is computed after the cash budget
has been prepared.
Budgeted Income Statement
Budgeted income from operations

is often a benchmark for judging
management performance.
Objective 4
Prepare the financial budget.
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
Cash Budget
Total cash available before financing =

Beginning cash balance + Cash receipts
Cash receipts depend on collections from

customers’ accounts receivable and cash sales
and on other operating income sources.
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 wages, salaries,

commission terms, and payroll dates.
Cash Budget
Disbursements for some costs and expenses

depend on contractual terms for installment
payments, mortgage payments, rents, leases,
and miscellaneous items.
Other disbursements include outlays for

fixed assets, long-term investments,
dividends, and the like.
Cash Budget
Management determines the minimum

cash balance desired depending on the
nature of the business and credit arrangements.
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.
Cash Budget
Ending cash balance

= Total cash available before financing
– Total disbursements + Cash from financing
The cash from financing can be either

positive (borrowing) or negative (repayment).
Budgeted Balance Sheet
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 as
expressed in the previous schedules.
Objective 5
Understand the difficulties

of sales forecasting.
Sales Forecast
 A sales forecast is a prediction of sales
under a given set of conditions.
Factors to Consider When
Forecasting Sales
1 Past patterns of sales
2 Estimates made by the sales force
3 General economic conditions
4 Competitors’ actions
Factors to Consider When
Forecasting Sales
5 Changes in the firm’s prices
6 Changes in product mix
7 Market research studies
8 Advertising and sales promotion plans
Objective 6
Anticipate possible human

relations problems caused
by budgets.
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.
Acceptance of the Budget
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.
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.
Objective 7
Use a spreadsheet to develop

a budget.
Software
Spreadsheet software for personal computers

is a powerful and flexible tool for budgeting.
Sensitivity analysis is the systematic varying

of budget data input to determine the effects
of each change on the budget.
Objective 8
Understand the importance

of budgeting to managers.
Importance of Budgets
to Managers
The budgetary process compels managers to

think and to prepare for changing conditions.
Importance of Budgets
to Managers
Budgets are aids in planning, communicating, setting

standards of performance, motivating personnel
toward goals, measuring results, and directing
attention to problem areas that need investigation.
End of Chapter 7

The Master Budget

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The Master Budget

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Chapter 7

The Master Budget

Explain the major features

Aids managers in coordinating

Provides definite expectations that are the

Strategic Plan Long-Range Plan

Capital Budget Master Budget

summarizes the Production

Follow the principal steps in

Purchases Schedules Costs

Sales Purchases Cost of Operating Budgeted

Prepare the operating budget

Budgeted purchases = Desired ending inventory

The income statement will be complete

Budgeted income from operations

Prepare the financial budget.

The cash budget has the following major sections:

Total cash available before financing =

Cash receipts depend on collections from

Cash disbursements for purchases depend on

Payroll depends on wages, salaries,

Disbursements for some costs and expenses

Other disbursements include outlays for

Management determines the minimum

Financing requirements depend on how

Needs include the disbursements plus

Ending cash balance

The cash from financing can be either

The final step in preparing the master budget

Understand the difficulties

Anticipate possible human

Another problem that can negate the benefits

Use a spreadsheet to develop

Spreadsheet software for personal computers

Sensitivity analysis is the systematic varying

Understand the importance

The budgetary process compels managers to

Budgets are aids in planning, communicating, setting

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