Chapter 3

Master Budgets
Learning Objectives

1. Describe budgeting
objectives, benefits, and
procedures and how human
behavior influences
budgeting
2. Define budget types and
the components of the
master budget

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Learning Objectives

3. Prepare an operating
budget for a
manufacturing company
4. Prepare a financial budget
for a manufacturing
company
5. Describe how information
technology can be used in
the budgeting process

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Learning Objectives

6. Prepare an operating
budget for a merchandising
company (Appendix 22A)
7. Prepare a financial budget
for a merchandising
company (Appendix 22A)

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Learning Objective 1

Describe budgeting
objectives, benefits, and
procedures and how human
behavior influences budgeting

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 Why Do Managers Use Budgets?

• A budget is a financial plan that managers

use to coordinate a business’s activities.
• Managers use budgets to:
– Develop strategies.
– Plan and budget for specific actions to achieve
goals.
– Implement the plan.
– Take corrective action.

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Budgeting Objectives

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 Budgeting Objectives

• Budgeting requires managers to plan for

the company’s future.
• The budget coordinates a company’s
activities.
• A budget provides a benchmark that
motivates employees and helps managers
evaluate performance.

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Benchmarking

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 Budgeting Procedures

• Budgeting procedures vary from company

to company.
• Budgeting should include input from all
levels within the organization.
• Budgeting usually begins several months
before the beginning of the budget period.

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 Budgeting and Human Behavior

• Managers must:
– Support the budget
– Show employees how budgets can help them
achieve better results
– Require that employees participate in
developing the budget
• Budgetary games:
– Budgetary slack occurs when managers
intentionally understate expected revenues or
overstate expected expenses.
– Spend it or lose it.

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Learning Objective 2

Define budget types and the

components of the master
budget

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Are There Different Types of Budgets?

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 Static and Flexible Budgets

• A static budget is a budget prepared for

only one level of sales volume.
• A flexible budget is a budget prepared for
various levels of sales volume.

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 Master Budgets

• The master budget is the set of budgeted

financial statements and supporting
schedules for the entire organization.
• The capital expenditures budget presents the
company’s plan for purchasing long-term
assets.
• A financial budget includes the cash budget
and the budgeted financial statements.
• The cash budget details how the business
expects to go from the beginning cash
balance to the ending cash balances.
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Master Budgets

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Learning Objective 3

Prepare an operating budget

for a manufacturing company

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 How Are Operating Budgets Prepared
for a Manufacturing Company?
• The master budget includes the following
budgets:
– Sales budget
– Production budget
– Direct materials budget
– Direct labor budget
– Manufacturing overhead budget
– Cost of goods sold budget
– Selling and administrative budget

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How Are Operating Budgets Prepared
for a Manufacturing Company?

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 Sales Budget

• The forecast of sales revenue is the

cornerstone of the master budget.

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 Production Budget

• The production budget is the basis for

product costs budgets, direct materials
budget, direct labor budgets, and
manufacturing overhead budgets.

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Production Budget

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 Direct Materials Budget

• After completing the production budget,

Smart Touch Learning needs to determine
the product costs for the tablets.

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Direct Materials Budget

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Direct Labor Budget

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 Manufacturing Overhead Budget

• The predetermined overhead allocation

rate is used to allocate the indirect
overhead costs to the tablets produced by
Smart Touch Learning.

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Manufacturing Overhead Budget

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Cost of Goods Sold Budget

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Selling and Administrative Expense
Budget

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Learning Objective 4

Prepare a financial budget

for a manufacturing
company

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 How Are Financial Budgets Prepared
for a Manufacturing Company?
• The financial budgets include the cash
budget and the budgeted financial
statements:
– Budgeted income statement
– Budgeted balance sheet
– Budgeted statement of cash flows

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 Capital Expenditures Budget

• The purchase of long-term assets is part

of a strategic plan.
• Capital expenditures are purchases of
long-term assets, such as:
– Delivery trucks
– Computer systems
– Office furniture
– Manufacturing equipment

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 Cash Budget

• The cash budget pulls information from

the other budgets previously prepared.
• The cash budget has three sections:
– Cash receipts
– Cash payments
– Short-term financing

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Cash Receipts

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 Cash Payments

• Capital expenditures
• Product costs:
– Direct materials purchases
– Direct labor costs
– Manufacturing overhead costs

• Selling and administrative expenses

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Short-Term
Financing

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Short-Term Financing

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Short-Term Financing

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Short-Term Financing

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Short-Term Financing

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 Budgeted Income Statement

• Below is a summary of the sources used to

calculate the budgeted income statement.

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Budgeted Income Statement

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Budgeted Balance Sheet

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Budgeted Statement of Cash Flows

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Learning Objective 5

Describe how information

technology can be used in
the budgeting process

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 How Can Information Technology Be
Used in the Budgeting Process?
• To conduct sensitivity analysis
• To combine individual unit budgets to
create the companywide master budget

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Learning Objective 6

Prepare an operating budget

for a merchandising company
(Appendix 22A)

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How Are Operating Budgets Prepared
for a Merchandising Company?

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Sales Budget

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Sales Budget

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 Inventory, Purchases, and Cost of
Goods Sold Budget
• The cost of goods sold computation shows
the relationship between inventory,
purchases, and ending inventory:

• The equation can be rearranged to find the

amount of purchases required:

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Inventory, Purchases, and Cost of
Goods Sold Budget

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Selling and Administrative
Expense Budget

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Learning Objective 7

Prepare a financial budget for

a merchandising company
(Appendix 22A)

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 How Are Financial Budgets Prepared
for a Merchandising Company?
• The budgets for a merchandising company
include:
– Capital expenditures budget
– Cash budget
– Budgeted income statement
– Budgeted balance sheet
– Budgeted statement of cash flows

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Cash Receipts

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Cash Payments

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Cash Payments

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 Short-Term Financing

• Companies often borrow funds to maintain

a minimum cash balance.
• For example, Greg’s Games borrows cash
in $1,000 increments at an annual interest
rate of 12%.

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Short-Term Financing

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Budgeted Income Statement

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Budgeted Balance Sheet

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Budgeted Balance Sheet

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Budgeted Statement of Cash Flows

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