The Master Budget

Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

1. Chapter 13
The Master Budget
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 2)
•Explain why budgeting is important
•Describe how strategic and tactical planning
are related to budgeting
•Identify the starting point of a master
budget
•Prepare various master budget schedules

3. Learning Objectives (2 of 2)
•Explain how the master budget schedules
relate to one another
•Clarify why the cash budget is important in
the master budgeting process
•(Appendix) Explain how a budget manual
facilitates the budgeting process

4. Management
Planning is the cornerstone of
effective management

5. Terms
•Budgeting-Formalizes plans and translates
qualitative narratives into a documented,
quantitative format
•Budget -Expresses a commitment to
planned activities and resource acquisition
and use

6. Budgets
•Communicate objectives, constraints, and
expectations
•Provide financial predictions
•Identify potential problems
•Determine resource allocation and
constraints
•Permit control through budget-to-actual
comparisons

7. The Planning Process
Strategic
Planning
Tactical
Planning
Budget

8. Strategic Planning
•Long-term (5 to 10 years)
•Top-level management
•Long-range goals, strategies, and policies
•Foundation for short-term planning
•Identify and gather information on key
variables, both internal and external

9. External Key Variables
•Competitor actions
•U.S. market conditions
•U.S. political/regulatory climate
•Emerging technology issues
•Consumer trends and attitudes
•International market conditions
•Demographics
•International political/regulatory climate

10. Tactical Plans
•Short-term (1 to 18 months)
•Top and mid-management
•Specific objectives and means to achieve
strategic plans
•Basis against which results can be measured

11. Budgeting
•Short-term
•Top, mid, and operational management
•Usable guidelines to implement strategic
and tactical plans
•Allocates resources
•Standard against which performance can be
measured

12. The Control Phase
•Actual-to-budget comparisons
•Determining and investigating variances
•Corrective action
•Feedback to operating managers
Budget

13. The Balanced Scorecard
•Financial performance
•Customer satisfaction
•Innovation and
learning
•Key performance
indicators
•Measures
–Short-term
performance
–Indicators of future
success

14. The Master Budget
Operating Budget Financial Budget
Sales Budget
Production Budget
Purchases Budget
Direct Labor Budget
Overhead Budget
Selling & Administrative
Budget
Cash Budget
Capital Expenditures
Budget
Balance Sheet
Income Statement
Statement of Cash
Flows
Statement of Retained
Earnings

15. The Operating Budget
Sales Budget

16. Sales Forecast
•Ask sales personnel
•Extrapolate past trends
•Use market research
•Employ statistical models
and simulation
Sales
Forecast

17. The Operating Budget
Sales Budget
Production Budget

18. The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget

19. The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
Admin
Expense
Budget
Selling
Expense
Budget

20. The Financial Budget
Operating Budget

21. The Financial Budget
Operating Budget
Cash Budget
Capital
Budget

22. The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement

23. The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement
Statement of
Retained Earnings

24. The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement
Statement of
Retained Earnings Balance Sheet

25. The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement
Statement of
Retained Earnings Balance Sheet
Statement of
Cash Flows

26. Budgets Provide
•Guide to align activities and resources with
organizational goals
•Vehicle to promote employee participation,
cooperation, and departmental coordination
•Tool to enhance planning, controlling,
problem solving, and evaluating
Budget

27. Budgeting Provides
•Basis to sharpen responsiveness to internal
and external factors
•Model to view future performance and
consider alternative measures
Budget

28. Budgeting Terms
•Continuous budgeting
–12-month rolling budget

29. Budgeting Terms
•Continuous budgeting
•Budget slack
–intentional underestimation of revenue
–intentional overestimation of expenses
–overcome by linking actual performance to
budget through a bonus system

30. Budgeting Terms
•Continuous budgeting
•Budget slack
•Participatory budget
–developed by top management and operating
personnel

31. Budgeting Terms
•Continuous budgeting
•Budget slack
•Participatory budget
•Imposed budgets
–developed by top management
–imposed on operating personnel

32. Activity Budget
•Map line items in budget to list of activities
•Raise awareness of non-value-added
activities
•Question and reduce non-value-added costs
Budget

33. Budget Manual
•Statements of budgetary purpose and its
desired results
•Listing of specific budgetary activities to be
performed
•Calendar of scheduled budgetary activities
•Sample of budgetary forms
•Original, revised, and approved budgets

34. Questions
•How are strategic and tactical planning
related to budgeting?
•In what order are the master budget
schedules prepared?
•Why is the cash budget important in the
master budgeting process?