Chapter 8: The Master Budget Cost Accounting: Foundations

Chapter 8: The Master Budget Cost Accounting: Foundations

Chapter 8: The Master Budget Cost Accounting: Foundations & Evolutions, 9e Kinney and Raiborn 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives

How are strategic planning and tactical planning related to budgeting? What is the starting point of a master budget, and why? What are the various components of a master budget and how are they prepared? Why is the cash budget so important in the master budgeting process? How and why are budgeted financial statements prepared at the end of the budgeting process? What benefits are provided by a budget? (Appendix) How does a budget manual facilitate the budgeting process? 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Terms BudgetingFormalizes plans and

translates qualitative narratives into a documented, quantitative format BudgetExpresses a commitment to planned activities, resource acquisition, and resource use 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Planning 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 variablesboth internal and external 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Tactical Planning Tactical Planning Short term (1 to 18 months) Top and middle management Specific objectives and means to achieve strategic plans Basis against which results can be measured

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Budgeting Budget Short term Top, middle, and operational management involvement Usable guidelines to implement strategic and tactical plans Allocates resources Standard against which performance can be measured

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Master Budget A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements For a specific period of time Staticbased on a single level of output demand Interactivedepartments generate and consume information 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Master Budget

Budget Operating Budgets Financial Budgets 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 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Operating Budget Sales Budget Production Budget Purchases Budget Selling and Administration Budget

Overhead Budget Direct Labor Budget 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Sales Forecast Ask sales personnel Extrapolate past trends Use market research Employ statistical models and simulation Sales Forecast 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Production Budget Production manager combines Sales estimates Beginning inventory targets Ending inventory targets Determines the types, quantities, and timing of products to be manufactured 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Direct Labor Budget Total number of people Specific types of workers Production hours needed Costs

Union contracts Minimum wage laws Fringe benefit costs Payroll taxes 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Overhead Budget Identify activity base Estimate overhead costs Separate costs as fixed or variable Show total costs for operating budgets Show costs without depreciation for cash budgets

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Capital Budget Long-term fixed asset needs Plant Equipment Payment points 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cash Budget

Highlights the importance of cash for an organizations continued existence Translates accrual-based information into cash flows Indicates effectiveness of credit practices Allows for planned cash borrowing or investing Used to prepare pro forma Cash Flow Statement 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The Financial Budget Cash Budget Statement of Cash Flows Income Statement/ Cost of Goods Operating Budget Manufactured Statement of Retained Earnings Capital Budget Balance Sheet 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly

accessible website, in whole or in part. Budgeting Terms Continuous budgeting Budget slack Participatory budget Imposed budgets developed by top management imposed on operating personnel 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly

accessible website, in whole or in part. Questions How are strategic and tactical planning related to budgeting? What are the various components of a master budget, and how are they prepared? Why is the cash budget important in the master budgeting process? 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Potential Ethical Issues Using a single budget system globally that may conflict with national cultures Permitting budget slack Distorting budgeting process by treating short-term conditions as longterm ones Using fraudulent accounting techniques to meet budget goals Failure to communicate big picture assumptions to all managers participating in the budget process Promoting spend-it-or-lose-it attitudes to punish cost savings and reward spending Mandating across-the-board budget cuts without considering alternative cost reductions Ignoring employee input in budgeting Justifying management decisions by using backwards budgeting

Disregarding contingencies in budgeting Ignoring external performance measures and benchmarks 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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