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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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Advantages of Budgets
Goals and Objectives
Budgets
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Types of Budgets
Strategic Plan Long-Range Plan
Capital Budget Master Budget
Continuous Budget
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Master Budget…
summarizes theplanned activitiesof all subunits ofan organization.
Sales
Production
Distribution
Finance
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Budget
Financial Budget
Master Budget
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 2
Follow the principal steps in
preparing a master budget.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Master Budget
Sales Budget
Master Budget
Purchases Schedules Costs
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
BudgetedBalanceSheet_____ __________ __________ __________ __________ _____
BudgetedBalanceSheet_____ __________ __________ __________ __________ _____
CapitalBudget_____ __________ __________ __________ __________ _____
CapitalBudget_____ __________ __________ __________ __________ _____
CashBudget
_____ __________ __________ __________ __________ _____
CashBudget
_____ __________ __________ __________ __________ _____
Components of Master Budget
FinancialBudget
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 3
Prepare the operating budget
and the supporting schedules.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Budget
Sales Budget
Purchases Budget
Operating Expenses Budget
Cash collectionsfrom customers
Disbursements for purchases
Disbursements for operating expenses
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/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 month’s cash sales plus the previous month’s credit sales.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Purchases Budget
Budgeted purchases = Desired ending inventory+ Cost of goods sold – Beginning inventory
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Expense Budget
Expenses driven by sales volume include sales commissions and many delivery expenses.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Expense Budget
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Expense Disbursements
Disbursements for operating expenses are based on the operating expense budget.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Budgeted Income Statement
Budgeted income from operationsis often a benchmark for judgingmanagement performance.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 4
Prepare the financial budget.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Budget
Management determines the minimumcash balance desired depending on thenature of the business and credit arrangements.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 5
Understand the difficulties
of sales forecasting.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Sales Forecast
A sales forecast is a prediction of sales under a given set of conditions.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 6
Anticipate possible human
relations problems caused
by budgets.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 7
Use a spreadsheet to develop
a budget.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 8
Understand the importance
of budgeting to managers.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Importance of Budgets to Managers
The budgetary process compels managers tothink and to prepare for changing conditions.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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.
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