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Chapter 13
The Master Budget
Cost AccountingTraditions and Innovations
Barfield, Raiborn, Kinney
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
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
Management
Planning is the cornerstone of effective management
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
Budgets
• Communicate objectives, constraints, and expectations
• Provide financial predictions
• Identify potential problems
• Determine resource allocation and constraints
• Permit control through budget-to-actual comparisons
The Planning Process
Strategic
Planning
Tactical
Planning
Budget
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
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
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
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
The Control Phase
• Actual-to-budget comparisons
• Determining and investigating variances
• Corrective action
• Feedback to operating managers
Budget
The Balanced Scorecard
• Financial performance• Customer satisfaction• Innovation and
learning• Key performance
indicators
• Measures– Short-term
performance– Indicators of future
success
The Master Budget
Operating Budget Financial BudgetSales BudgetProduction BudgetPurchases BudgetDirect Labor BudgetOverhead Budget
Selling & Administrative Budget
Cash BudgetCapital Expenditures
BudgetBalance SheetIncome Statement
Statement of Cash Flows
Statement of Retained Earnings
The Operating Budget
Sales Budget
Sales Forecast
• Ask sales personnel
• Extrapolate past trends
• Use market research
• Employ statistical models and simulation
SalesForecast
The Operating Budget
Sales Budget
Production Budget
The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
Admin Expense Budget
Selling Expense Budget
The Financial Budget
Operating Budget
The Financial Budget
Operating Budget
Cash Budget
Capital Budget
The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement
The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement
Statement of Retained Earnings
The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement
Statement of Retained Earnings Balance Sheet
The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement
Statement of Retained Earnings Balance Sheet
Statement of Cash Flows
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
Budgeting Provides
• Basis to sharpen responsiveness to internal and external factors
• Model to view future performance and consider alternative measures
Budget
Budgeting Terms
• Continuous budgeting – 12-month rolling budget
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
Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget– developed by top management and operating
personnel
Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget
• Imposed budgets– developed by top management– imposed on operating personnel
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
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
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?