week9-themasterbudget

8/4/2019 Week9-TheMasterBudget

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 7 - 1

The Master Budget

Chapter 7


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Advantages of Budgets

Budgets

Goals and

objectives

A budget allows systematic rather

than chaotic reaction to change.


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Advantages of Budgets

Provides definite

expectations that

are the best framework

to evaluate performance

Aids managers in

coordinating their efforts

Compels

managers

to think

ahead


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Types of Budgets

Strategic plan

Long

-

range plan

Capital budget

Master budget

Continuous budget


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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.


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Long-Range Plan

The strategic plan leads to long

-

range

planning, which produces

forecasted financial statements

for five

-

to ten

-

year periods.


7/402005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 7 - 7

Capital Budget

Long-range plans

are coordinated with capital budgets,which detail the planned expendituresfor facilities, equipment, new products,

and other long-term investments.



Master Budget

Sales

Production

Distribution

Finance

The master budget

summarizes the

planned activities

of all subunits of

an organization.



Continuous Budget

Rolling budgets...

are a common form of

master budgets thatadd a month in thefuture as the month

just ended is dropped.



Operating budget

Financial budget

Components of Master Budget



Steps in Preparing the

Master Budget

1. Basic dataa. Sales budgetb. Cash collections from customers

c. Purchases budgetd. Disbursements for purchasese. Operating expense budgetf. Disbursements for operating expenses

The principal steps in preparingthe master budget are:


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Steps in Preparing the

Master Budget

1. Basic data

2. Operating budget

3. Financial budget


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Operating Budget

Salesbudget

Cash collectionsfrom customers

Disbursementsfor purchases

Disbursements foroperating expenses

Purchasesbudget

Operating expensesbudget


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Cash Collections

It is easiest to prepare budgetedcash collections at the same

time as the sales budget.

Cash collections include the currentmonths cash sales plus the

previous months credit sales.


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Purchases Budget

Budgeted purchases

= Desired ending inventory+ Cost of goods sold

Beginning inventory


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Disbursements for Purchases

For example, 50% of the current monthspurchases and 50% of the previousmonths purchases may be included.

The total disbursements are then

used in preparing the cash budget.


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Operating Expense Budget

The budgeting of operating expensesdepends on several factors.

Month-to-month changes in salesvolume and other cost-driver activities

directly influence many operating expenses.


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Expenses driven by sales volumeinclude sales commissions

and many delivery expenses.


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Other expenses are not influenced by salesor other cost-driver activity and are regarded

as fixed, within appropriate relevant ranges.

Rent

Insurance

Depreciation

Salaries


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Operating Expense

Disbursements

Disbursements for operating expenses arebased on the operating expense budget.


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Operating Expense

Disbursements

For example, 50% of last monthsand this months wages and

commissions plus miscellaneousand rent expenses may be included.

The total of these disbursements is thenused in preparing the cash budget.


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Budgeted Income Statement

The income statement will be completeafter addition of the interest expense,

which is computed after the cashbudget has been prepared.

Budgeted income from operationsis often a benchmark for judging

management performance.


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Cash Budget

The cash budget has the following major sections:

available cash balancecash receipts disbursementscash needed from (or used for) financing

ending cash balance


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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 dependon 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 expensesdepend on contractual terms for installment

payments, mortgage payments, rents,leases, and miscellaneous items.


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Cash Budget

Management determines the minimumcash balance desired depending

on the nature of the businessand credit arrangements.


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Cash Budget

Financing requirements depend on howthe 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

+ ReceiptsDisbursements+ 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 budgetis to construct the budgeted balance sheetthat projects each balance sheet item in

accordance with the business plan.


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Sales Forecast

A sales forecast is a prediction of salesunder a given set of conditions.

Sales forecasts are usually prepared underthe direction of the top sales executive.


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Factors to Consider When

Forecasting Sales

Competitors actions

Past patterns of sales

Estimates made by the sales force

General economic conditions


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Factors to Consider When

Forecasting Sales

Advertising and sales promotion plans

Changes in the firms prices

Changes in product mix

Market research studies


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Getting Employees to Accept

the Budget

To fully benefit from budgets, anorganization needs the support

of all the firms employees.

The attitude of top management will

heavily influence lower-levelworkers and managers attitudes.


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Getting Employees to Accept

the Budget

Another problem that can negate the benefitsof budgeting arises if budgets stress one setof performance goals, but employees and

managers are rewarded for different

performance measures.


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Participative Budgeting

Budgets created with the active participationof all affected employees are generally moreeffective than budgets imposed on subordinates.


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Functional Budgeting

The budgeting focus is on preparing

budgets for various functionssuch as production, selling,and administrative support.


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Activity-Based Master Budgets

Emphasizes the planning and controlpurpose of cost management.

Focus is on estimating the demandfor each activitys output as measured by its

cost driver and consumption of resources.

Considered more useful for controllingwaste & improving efficiency.


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Exercise

Question:

Many non-profit organisations use budgetsprimarily to limit spending. Why does this limitthe effectiveness of budgets?

[This tests your knowledge of the many roles

of budgets.]


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Exercise

- Helps managers to plan ahead.- Provides definite expectations that are the best

framework to evaluate performance- Aids managers in coordinating their efforts- A decision tool. It helps managers project the

results of their decisions, thereby aiding them

in making the right decisions.- Provides a base for adapting to change.

week9-themasterbudget

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