Master Budgeting

Chapter 8

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 8-2

The Basic Framework of Budgeting

A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.
 8-3

Difference Between Planning and

Control
Planning
Planning –– Control
Control ––
involves
involves developing
developing involves
involves the
the steps
steps taken
taken
objectives
objectives and
and by
by management
management to to
preparing
preparing various
various increase
increase the
the likelihood
likelihood that
that
budgets
budgets to
to achieve
achieve the
the objectives
objectives setset down
down
those
those objectives.
objectives. while
while planning
planning areare attained
attained
and
and that
that all
all parts
parts ofof the
the
organization
organization areare working
working
together
together toward
toward that
that goal.
goal.
 8-4

Advantages of Budgeting
Define goals
and objectives
Communicate
plans

Advantages
Coordinate Means of allocating
activities resources

Uncover potential
bottlenecks
 8-5

Responsibility Accounting
Managers should be held
responsible for those items -
and only those items - that
they can actually control
to a significant extent.
Responsibility accounting
enables organizations to react
quickly to deviations from their
plans and to learn from
feedback.
 8-6

Choosing the Budget Period

Operating Budget

2014 2015 2016 2017

Operating
Operating budgets
budgets ordinarily
ordinarily AA continuous
continuous budget
budget is
is aa
cover
cover aa one-year
one-year period
period 12-month
12-month budget
budget that
that rolls
rolls
corresponding to a company’s
corresponding to a company’s forward one month (or quarter)
fiscal year. Many companies forward one month (or quarter)
fiscal year. Many companies as the current month (or quarter)
divide their annual budget as the current month (or quarter)
divide their annual budget is
into four quarters. is completed.
completed.
into four quarters.
 8-7

Self-Imposed Budget
Top M anagem ent

M id d le M id d le
M anagem ent M anagem ent

S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r
A self-imposed budget or participative budget is a budget that is
prepared with the full cooperation and participation of managers
at all levels.
 8-8

Advantages of Self-Imposed Budgets

1.
1. Individuals
Individuals at
at all
all levels
levels of
of the
the organization
organization are
are viewed
viewed as
as
members
members of of the
the team
team whose
whose judgments
judgments are
are valued
valued by
by top
top
management.
management.
2.
2. Budget
Budget estimates
estimates prepared
prepared by
by front-line
front-line managers
managers are
are
often
often more
more accurate
accurate than
than estimates
estimates prepared
prepared by
by top
top
managers.
managers.
3.
3. Motivation
Motivation isis generally
generally higher
higher when
when individuals
individuals participate
participate
in
in setting
setting their
their own
own goals
goals than
than when
when the
the goals
goals are
are
imposed
imposed from
from above.
above.
4.
4. A
A manager
manager who
who is
is not
not able
able to to meet
meet aa budget
budget imposed
imposed
from
from above
above can
can claim
claim that
that itit was
was unrealistic.
unrealistic. Self-imposed
Self-imposed
budgets
budgets eliminate
eliminate this
this excuse.
excuse.
 8-9

Self-Imposed Budgets
Self-imposed budgets should be reviewed
by higher levels of management to
prevent “budgetary slack.”
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.
 8-10

Human Factors in Budgeting

The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.
 8-11

The Master Budget: An Overview

Sales
Sales budget
budget

Selling
Selling and
and
Ending
Ending inventory
inventory administrative
administrative
Production
Production budget
budget
budget
budget budget
budget

Direct
Direct materials
materials Direct
Direct labor
labor Manufacturing
Manufacturing
budget
budget budget
budget overhead
overhead budget
budget

Cash
Cash Budget
Budget

Budgeted
Budgeted Budgeted
Budgeted
income
income balance
balance sheet
sheet
statement
statement
 8-12

Seeing the Big Picture

To help you see the “big picture” keep in mind
that the 10 schedules in the master budget are
designed to answer the 10 questions shown on
the next screen.
 8-13

Seeing the Big Picture

1. How much sales revenue will we earn?
2. How much cash will we collect from customers?
3. How much raw material will we need to purchase?
4. How much manufacturing costs will we incur?
5. How much cash will we pay to our suppliers and our direct laborers, and how
much cash will we pay for manufacturing overhead resources?
6. What is the total cost that will be transferred from finished goods inventory to
cost of good sold?
7. How much selling and administrative expense will we incur and how much
cash will be pay related to those expenses?
8. How much money will we borrow from or repay to lenders – including
interest?
9. How much operating income will we earn?
10. What will our balance sheet look like at the end of the budget period?
 8-14

The Master Budget: An Overview

A master budget is based on various estimates

and assumptions. For example, the sales
budget requires three estimates/assumptions
as follows:
1.What are the budgeted unit sales?
2.What is the budgeted selling price per unit?
3.What percentage of accounts receivable will
be collected in the current and subsequent
periods.
 8-15

The Master Budget: An Overview

When Microsoft Excel© is used to create a
master budget, these types of assumptions
can be depicted in a Budget Assumptions
tab, thereby enabling Excel-based budget to
answer “what-if” questions.
 8-16

Format of the Cash Budget

The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
 8-17

End of Chapter 8