master budget
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©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 11
Introduction to Budgets Introduction to Budgets and Preparing the Master and Preparing the Master
BudgetBudget
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 22
BudgetsBudgets Goals and Goals and objectivesobjectives
A budget provides a comprehensive financial A budget provides a comprehensive financial overview of planned company operations.overview of planned company operations.
LearningLearningObjective 1Objective 1
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 33
Provide an opportunity to Provide an opportunity to reevaluate existing activitiesreevaluate existing activities
and evaluate new ones.and evaluate new ones.
Aid managers in communicating Aid managers in communicating objectives and coordinating actions objectives and coordinating actions
across the organization. across the organization.
CompelCompelmanagersmanagers
to thinkto thinkaheadahead
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 44
1. Low levels of participation in the 1. Low levels of participation in the budget process andbudget process and
Lack of acceptance of responsibility Lack of acceptance of responsibility for the final budget.for the final budget.
2. Incentives to lie and cheat in the 2. Incentives to lie and cheat in the budget process.budget process.
3. Difficulties in obtaining accurate 3. Difficulties in obtaining accurate sales forecasts.sales forecasts.
1. Low levels of participation in the 1. Low levels of participation in the budget process andbudget process and
Lack of acceptance of responsibility Lack of acceptance of responsibility for the final budget.for the final budget.
2. Incentives to lie and cheat in the 2. Incentives to lie and cheat in the budget process.budget process.
3. Difficulties in obtaining accurate 3. Difficulties in obtaining accurate sales forecasts.sales forecasts.
LearningLearningObjective 2Objective 2
Management should seek Management should seek to create an environment to create an environment where there is a true where there is a true two-way flow of two-way flow of information.information.
Management should seek Management should seek to create an environment to create an environment where there is a true where there is a true two-way flow of two-way flow of information.information.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 55
Participative budgets are Participative budgets are formulated with the formulated with the active participation of all active participation of all affected employees.affected employees.
Participative budgets are Participative budgets are formulated with the formulated with the active participation of all active participation of all affected employees.affected employees.
Message Message conveyed by the conveyed by the budget system budget system may be may be misaligned with misaligned with incentives incentives provided by the provided by the compensation compensation system.system.
Message Message conveyed by the conveyed by the budget system budget system may be may be misaligned with misaligned with incentives incentives provided by the provided by the compensation compensation system.system.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 66
Dysfunctional Dysfunctional incentives lead incentives lead managers to make managers to make poor decisions. poor decisions.
Lying can arise if the Lying can arise if the budget process budget process creates incentives to creates incentives to bias the budget bias the budget information.information.Budgetary Slack (budget padding) is Budgetary Slack (budget padding) is
the overstatement or understatement the overstatement or understatement of budgeted revenue to create a goal of budgeted revenue to create a goal that is easier to achieve.that is easier to achieve.
LearningLearningObjective 3Objective 3
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 77
A sales forecast is a prediction of salesA sales forecast is a prediction of salesunder a given set of conditions.under a given set of conditions.
Sales forecasts are usually prepared underSales forecasts are usually prepared underthe direction of the top sales executive.the direction of the top sales executive.
LearningLearningObjective 4Objective 4
The sales budget is the result of decisions to create The sales budget is the result of decisions to create Conditions that will generate a desired level of sales.Conditions that will generate a desired level of sales.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 88
Competitors’
Competitors’
actionsactions
Past patterns
Past patterns
of sales
of sales
Estimates made
Estimates made
By sales force
By sales forceGen
eral
Gener
al
econ
omic
econ
omic
conditi
ons
conditi
ons
Changes in the
Changes in the
firm’s prices
firm’s pricesChanges in
Changes in
product mix
product mix
Market Market
research research
studiesstudies
Advertisin
g
Advertisin
g
and sales
and sales
promotion plans
promotion plans
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 99
Strategic planStrategic plan Long-range planningLong-range planning
Capital budgetCapital budget
Master budgetMaster budget
Continuous budget Continuous budget
LearningLearningObjective 5Objective 5
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1010
The most forward-looking budget is theThe most forward-looking budget is thestrategic plan, which sets the overallstrategic plan, which sets the overall
goals and objectives of the organization.goals and objectives of the organization.
The strategic plan leads to long-rangeThe strategic plan leads to long-rangeplanning, which producesplanning, which produces
forecasted financial statementsforecasted financial statementsfor five- to ten-year periods.for five- to ten-year periods.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1111
Long-range plans…Long-range plans…
are coordinated with capital budgets,are coordinated with capital budgets,which detail the planned expenditureswhich detail the planned expendituresfor facilities, equipment, new products,for facilities, equipment, new products,
and other long-term investments.and other long-term investments.
Master budgets link to both long-range Master budgets link to both long-range plans and short-term budgets.plans and short-term budgets.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1212
SalesSales
ProductionProduction
DistributionDistribution
FinanceFinance
The master budgetThe master budget
is a detailed and is a detailed and
comprehensive analysis comprehensive analysis
of the first year of theof the first year of the
long-range plan. long-range plan.
It summarizes theIt summarizes the
planned activitiesplanned activities
of all subunits ofof all subunits of
an organization.an organization.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1313
Rolling budgets...Rolling budgets...are a common form ofare a common form ofmaster budgets that master budgets that add a month in the add a month in the future as the month future as the month
just ended is dropped.just ended is dropped.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1414
Operating budgetOperating budget(Profit plan). . .(Profit plan). . .
Financial budget. . .Financial budget. . .
Focuses on the Focuses on the Income Statement Income Statement
and supporting and supporting schedules or schedules or
budgeted budgeted expenses.expenses.
Focuses on the Focuses on the effects that the effects that the
operating budget operating budget and other plans will and other plans will
have on cash have on cash balances.balances.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1515
1. Basic data1. Basic data
2. Operating budget2. Operating budget
3. Financial budget3. Financial budget
LearningLearningObjective 6Objective 6
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1616
1. Basic data1. Basic dataa.a. Sales budgetSales budgetb.b. Cash collections from customersCash collections from customersc.c. Purchases and cost-of-goods sold budgetPurchases and cost-of-goods sold budgetd.d. Cash disbursements for purchasesCash disbursements for purchasese.e. Operating expense budgetOperating expense budgetf.f. Cash disbursements for operating expensesCash disbursements for operating expenses
The principal steps in preparingThe principal steps in preparingthe master budget:the master budget:
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1717
Financial BudgetFinancial Budget3.3. Prepare forecasted financial statements:Prepare forecasted financial statements:
b.b. Capital budgetCapital budgetc.c. Cash budgetCash budgetd.d. Budgeted Balance sheetBudgeted Balance sheet
Operating BudgetOperating Budget2. Prepare budgeted income statement using basic data in step 1.2. Prepare budgeted income statement using basic data in step 1.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1818
SalesSalesbudgetbudget
Cash collectionsCash collectionsfrom customersfrom customers
DisbursementsDisbursementsfor purchasesfor purchases
Disbursements forDisbursements foroperating expensesoperating expenses
PurchasesPurchasesbudgetbudget
Operating expensesOperating expensesbudgetbudget
LearningLearningObjective 7Objective 7
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 1919
It is easiest to prepare budgetedIt is easiest to prepare budgetedcash collections at the samecash collections at the same
time as the sales budget.time as the sales budget.
Cash collections include the currentCash collections include the currentmonth’s cash sales plus themonth’s cash sales plus the
previous month’s credit sales.previous month’s credit sales.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2020
Budgeted purchasesBudgeted purchases= Desired ending inventory= Desired ending inventory
+ Cost of goods sold+ Cost of goods sold– – Beginning inventoryBeginning inventory
Disbursements could include 50% of the current month’s Disbursements could include 50% of the current month’s purchases and 50% of the Previous month’s purchases.purchases and 50% of the Previous month’s purchases.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2121
The budgeting of operating expenses depends on several factors.The budgeting of operating expenses depends on several factors.
Month-to-month changes in sales volume and other cost-driver Month-to-month changes in sales volume and other cost-driver activities directly influence many operating expenses.activities directly influence many operating expenses.
Expenses driven by Expenses driven by sales volume include sales volume include
sales commissions andsales commissions and many delivery expenses.many delivery expenses.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2222
Other expenses are not influenced by salesOther expenses are not influenced by salesor other cost-driver activity and are regardedor other cost-driver activity and are regardedas fixed, within appropriate relevant ranges.as fixed, within appropriate relevant ranges.
RentRent
InsuranceInsurance
DepreciationDepreciation
SalariesSalaries
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2323
Disbursements for operating expenses areDisbursements for operating expenses arebased on the operating expense budget.based on the operating expense budget.
Disbursements may include 50% of last month’s and this month’s Disbursements may include 50% of last month’s and this month’s wages and commissions plus miscellaneous and rent expenses.wages and commissions plus miscellaneous and rent expenses.
The total of these disbursements is thenThe total of these disbursements is thenused in preparing the cash budget.used in preparing the cash budget.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2424
The income statement will be completeThe income statement will be completeafter addition of the interest expense,after addition of the interest expense,
which is computed after the cashwhich is computed after the cashbudget has been prepared.budget has been prepared.
Budgeted income from operationsBudgeted income from operationsis often a benchmark for judgingis often a benchmark for judging
management performance.management performance.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2525
The Cash budget contains these major sections:The Cash budget contains these major sections: available cash balanceavailable cash balance net cash receipts and disbursementsnet cash receipts and disbursementsfinancingfinancing
LearningLearningObjective 8Objective 8
The cash budget is a The cash budget is a statement of planned statement of planned
cash receipts and cash receipts and disbursements. disbursements.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2626
Available cash balanceAvailable cash balance= Beginning cash balance= Beginning cash balance
– – Minimum cash balance desired.Minimum cash balance desired.
Cash receipts depend on collections fromCash receipts depend on collections fromcustomers’ accounts receivable, cash sales,customers’ accounts receivable, cash sales,
and on other operating income sources.and on other operating income sources.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2727
Cash disbursements for purchases dependCash disbursements for purchases dependon the credit terms extended by supplierson the credit terms extended by suppliers
and the bill-paying habits of the buyer.and the bill-paying habits of the buyer.
Payroll depends on wage, salary, and Payroll depends on wage, salary, and commission terms and on payroll dates.commission terms and on payroll dates.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2828
Other disbursements include outlays forOther disbursements include outlays forfixed assets, long-term investments,fixed assets, long-term investments,
dividends, and the like.dividends, and the like.
Disbursements for some costs and expensesDisbursements for some costs and expensesdepend on contractual terms for installmentdepend on contractual terms for installment
payments, mortgage payments, rents,payments, mortgage payments, rents,leases, and miscellaneous items.leases, and miscellaneous items.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 2929
Management determines the minimumManagement determines the minimumcash balance desired dependingcash balance desired depending
on the nature of the businesson the nature of the businessand credit arrangements.and credit arrangements.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3030
Financing requirements depend on howFinancing requirements depend on howthe total cash available comparesthe total cash available compares
with the total cash needed.with the total cash needed.
Needs include the disbursements plusNeeds include the disbursements plusthe desired ending cash balance.the desired ending cash balance.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3131
Ending cash balanceEnding cash balance= Beginning cash balance= Beginning cash balance
+ Receipts – Disbursements+ Receipts – Disbursements+ Cash from financing+ Cash from financing
The cash from financing can beThe cash from financing can beeither positive (borrowing)either positive (borrowing)or negative (repayment).or negative (repayment).
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3232
The final step in preparing the master budgetThe final step in preparing the master budgetis to construct the budgeted balance sheetis to construct the budgeted balance sheet
that projects each balance sheet item inthat projects each balance sheet item inaccordance with the business plan.accordance with the business plan.
Management then considers all Management then considers all the major financial statements as the major financial statements as a basis for changing the course of a basis for changing the course of events.events.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3333
An activity-based budgetary system An activity-based budgetary system emphasizes the planning and control emphasizes the planning and control
purpose of cost management.purpose of cost management.
Functional budgeting focuses on Functional budgeting focuses on preparing budgets for various preparing budgets for various functions such as production, functions such as production,
selling, and administrative support.selling, and administrative support.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3434
Financial models are only as good as the assumptions Financial models are only as good as the assumptions and the inputs used to build and manipulate them.and the inputs used to build and manipulate them.
Financial planning models are mathematical models Financial planning models are mathematical models that can incorporate the effects of alternative that can incorporate the effects of alternative
assumptions about sales, costs, or product mix.assumptions about sales, costs, or product mix.
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3535
Arithmetic errors are virtually nonexistent.Arithmetic errors are virtually nonexistent.
Spreadsheet software for personal computers is Spreadsheet software for personal computers is a powerful and flexible tool for budgeting thata powerful and flexible tool for budgeting thatcan be used to prepare mathematical models.can be used to prepare mathematical models.
Financial planning models are mathematical models Financial planning models are mathematical models that can incorporate the effects of alternative that can incorporate the effects of alternative
assumptions about sales, costs, or product mix.assumptions about sales, costs, or product mix.
LearningLearningObjective 9Objective 9
©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 14/e,14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - - 3636
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