Download The Master Budget

Chapter 7
The Master Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 1
Explain the major features
and advantages of a
master budget.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Advantages of Budgets
Budgets
Goals and
Objectives
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Advantages of Budgets
Compels managers
to think ahead
Aids managers in coordinating
their efforts
Provides definite expectations that are the
best framework to evaluate performance
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Types of Budgets
Strategic Plan
Long-Range Plan
Capital Budget
Master Budget
Continuous Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Capital Budget
Long-range plans…
are coordinated with capital budgets,
which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Master Budget…
Sales
summarizes the
planned activities
of all subunits of
an organization.
Production
Distribution
Finance
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Master Budget
Operating Budget
Financial Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 2
Follow the principal steps in
preparing a master budget.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Master Budget
Sales Budget
Master Budget
Purchases
Schedules
Costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Components of Master Budget
Inventory
Budget
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Sales
Budget
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Purchases
Budget
____ ____
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Cost of
Goods Sold
Budget
____ ____
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Operating
Expenses
Budget
____ ____
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____ ____
____ ____
Budgeted
Income
Statement
____ ____
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____ ____
____ ____
Operating Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Components of Master Budget
Cash
Budget
Capital
Budget
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Budgeted
Balance
Sheet
_____ _____
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_____ _____
_____ _____
Financial
Budget
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 3
Prepare the operating budget
and the supporting schedules.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Operating Budget
Sales Budget
Cash collections
from customers
Purchases Budget
Disbursements
for purchases
Operating Expenses Budget
Disbursements
for operating
expenses
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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 month’s
cash sales plus the previous month’s credit
sales.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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 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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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.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Operating Expense Budget

Expenses driven by sales volume include
sales commissions and many delivery
expenses.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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
Depreciation
Insurance
Salaries
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Operating Expense
Disbursements

Disbursements for
operating expenses
are based on the
operating expense
budget.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Budgeted Income Statement
Budgeted income from operations
is often a benchmark for judging
management performance.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 4
Prepare the financial budget.
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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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Cash Budget
Total cash available before financing =
Beginning cash balance + Cash receipts
Cash receipts depend on collections from
customers’ accounts receivable and cash sales
and on other operating income sources.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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 wages, salaries,
commission terms, and payroll dates.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cash Budget
Disbursements for some costs and expenses
depend on contractual terms for installment
payments, mortgage payments, rents, leases,
and miscellaneous items.
Other disbursements include outlays for
fixed assets, long-term investments,
dividends, and the like.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cash Budget
Management determines the minimum
cash balance desired depending on the
nature of the business and credit arrangements.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cash Budget
Ending cash balance
= Total cash available before financing
– Total disbursements + Cash from financing
The cash from financing can be either
positive (borrowing) or negative (repayment).
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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 as
expressed in the previous schedules.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 5
Understand the difficulties
of sales forecasting.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Sales Forecast

A sales forecast is a prediction of sales
under a given set of conditions.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Factors to Consider When
Forecasting Sales
1
2
3
4
Past patterns of sales
Estimates made by the sales force
General economic conditions
Competitors’ actions
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Factors to Consider When
Forecasting Sales
5
6
7
8
Changes in the firm’s prices
Changes in product mix
Market research studies
Advertising and sales promotion plans
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 6
Anticipate possible human
relations problems caused
by budgets.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Acceptance of the Budget
Another problem that can negate the benefits
of budgeting arises if budgets stress one set
of performance goals, but employees and
managers are rewarded for different
performance measures.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Objective 7
Use a spreadsheet to develop
a budget.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Software
Spreadsheet software for personal computers
is a powerful and flexible tool for budgeting.
Sensitivity analysis is the systematic varying
of budget data input to determine the effects
of each change on the budget.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Summary
Understand the importance
of budgeting to managers.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Importance of Budgets
to Managers
The budgetary process compels managers to
think and to prepare for changing conditions.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Importance of Budgets
to Managers
Budgets are aids in planning, communicating, setting
standards of performance, motivating personnel
toward goals, measuring results, and directing
attention to problem areas that need investigation.
The End
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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