introduction to master budget
TRANSCRIPT
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2008 Prentice Hall Business Publishing, Introduction to Management Accounting14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 1
Introduction to Management Accounting
Introduction to Budgets
and Preparing the Master Budget
Chapter 7
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Budgets and the Organization
Budgets
Goals and
objectives
A budget provides a comprehensive financial
overview of planned company operations.
Learning
Objective 1
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Benefits of Budgets
Provide an opportunity to
reevaluate existing activities
and evaluate new ones.
Aid managers in communicating
objectives and coordinating actions
across the organization.
Compel
managers
to think
ahead
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Human Relations Problems
1. Low levels of participation in the budget process andLack of acceptance of responsibility for the final budget.
2. Incentives to lie and cheat in the budget process.3. Difficulties in obtaining accurate sales forecasts.
Learning
Objective 2
Management should seek to createan environment where there is a
true two-way flow of information.
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Potential Problems in Implementing Budgets
Participative budgets are formulated with theactive participation of all affected employees.
Message conveyed by thebudget system may bemisaligned with incentivesprovided by thecompensation system.
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Incentives to Lie and Cheat
Dysfunctional incentiveslead managers to make
poor decisions.
Lying can arise if the budget
process creates incentives to
bias the budget information.
Budgetary Slack (budget padding) is the
overstatement or understatement of budgeted
revenue to create a goal that is easier to achieve.
Learning
Objective 3
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Sales Forecasting
A sales forecast is a prediction of sales
under a given set of conditions.
Sales forecasts are usually prepared under
the direction of the top sales executive.
Learning
Objective 4
The sales budget is the result of decisions to create
Conditions that will generate a desired level of sales.
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Factors to Consider When Forecasting Sales
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Types of Budgets
Strategic plan Long-range planning
Capital budget
Master budget
Continuous budget
Learning
Objective 5
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Strategic Plan
The most forward-looking budget is the
strategic plan, which sets the overall
goals and objectives of the organization.
The strategic plan leads to long-range
planning, which producesforecasted financial statements
for five- to ten-year periods.
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Long-range plans
are coordinated with capital budgets,
which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.
Long-range Plans
Master budgets link to both long-range
plans and short-term budgets.
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Master Budget
Sales
Production
Distribution
Finance
The master budget
is a detailed and
comprehensive analysis
of the first year of the
long-range plan.
It summarizes the
planned activitiesof all subunits of
an organization.
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Continuous Budget
Rolling budgets...are a common form of
master budgets thatadd a month in the
future as the month
just ended is dropped.
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Operating budget(Profit plan). . . Financial budget. . .
Master Budget
Focuses on the Income
Statement and
supporting schedulesor budgeted expenses.
Focuses on the effects
that the operating budget
and other plans will haveon cash balances.
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Steps in Preparing the Master Budget
1. Basic data
2. Operating budget
3. Financial budget
Learning
Objective 6
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Steps in Preparing the Master Budget
1. Basic dataa. Sales budget
b. Cash collections from customers
c. Purchases and cost-of-goods sold budget
d. Cash disbursements for purchases
e. Operating expense budget
f. Cash disbursements for operating expenses
The principal steps in preparing
the master budget:
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Steps in Preparing the Master Budget
Financial Budget
3. Prepare forecasted financial statements:
b. Capital budgetc. Cash budget
d. Budgeted Balance sheet
Operating Budget
2. Prepare budgeted income statement using basic data in step 1.
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Operating Budget
Sales
budget
Cash collections
from customers
Disbursements
for purchases
Disbursements for
operating expenses
Purchases
budget
Operating expenses
budget
Learning
Objective 7
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Cash Collections
It is easiest to prepare budgeted
cash collections at the same
time as the sales budget.
Cash collections include the current
months cash sales plus the
previous months credit sales.
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Purchases Budget and Cash Disbursements
Budgeted purchases
= Desired ending inventory
+ Cost of goods sold
Beginning inventory
Disbursements could include 50% of the current months
purchases and 50% of the Previous months purchases.
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Operating Expense Budget
The budgeting of operating expenses depends on several factors.
Month-to-month changes in sales volume and other cost-driveractivities directly influence many operating expenses.
Expenses driven bysales volume include
sales commissions and
many delivery expenses.
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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
Operating Expense Budget
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Operating Expense Disbursements
Disbursements for operating expenses are
based on the operating expense budget.
Disbursements may include 50% of last months and this months
wages and commissions plus miscellaneous and rent expenses.
The total of these disbursements is then
used in preparing the cash budget.
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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 from operations
is often a benchmark for judging
management performance.
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Financial Budget
The Cash budget contains these major sections: available cash balance net cash receipts and disbursementsfinancing
Learning
Objective 8
The cash budget is a statement of plannedcash receipts and disbursements.
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Cash Budget
Available cash balance
= Beginning cash balance
Minimum cash balance desired.
Cash receipts depend on collections from
customers accounts receivable, cash sales,
and on other operating income sources.
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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 wage, salary, and
commission terms and on payroll dates.
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Cash Budget
Other disbursements include outlays forfixed assets, long-term investments,
dividends, and the like.
Disbursements for some costs and expenses
depend on contractual terms for installment
payments, mortgage payments, rents,leases, and miscellaneous items.
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Cash Budget
Management determines the minimum
cash balance desired depending
on the nature of the business
and credit arrangements.
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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.
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Cash Budget
Ending cash balance
= Beginning cash balance
+ Receipts Disbursements
+ Cash from financing
The cash from financing can beeither positive (borrowing)
or negative (repayment).
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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.
Management then considers all the major
financial statements as a basis for changing
the course of events.
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Activity-Based Master Budgets
An activity-based budgetary system
emphasizes the planning and controlpurpose of cost management.
Functional budgeting focuses on
preparing budgets for various
functions such as production,
selling, and administrative support.
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Financial Planning Models
Financial models are only as good as the assumptions
and the inputs used to build and manipulate them.
Financial planning models are mathematical models
that can incorporate the effects of alternative
assumptions about sales, costs, or product mix.
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Spreadsheets for Budgeting
Arithmetic errors are virtually nonexistent.
Spreadsheet software for personal computers is
a powerful and flexible tool for budgeting that
can be used to prepare mathematical models.
Financial planning models are mathematical models
that can incorporate the effects of alternative
assumptions about sales, costs, or product mix.
Learning
Objective 9
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End of Chapter 7
The End