Master Budget and Responisbiltiy.ppt

8/17/2019 Master Budget and Responisbiltiy.ppt

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Chapter Outline

• Budget and the Budget Cycle

• Advantages and disadvantages of budgeti

• Developing an operating budget

• Time coverage of operating budget anaspect of budgeting

• Responsibility accounting• Controllability


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Learning Objectives

After completing this chapter students are to "

Describe the master budget and e!plain its

Describe the advantages and demerit of bu

$repare the operating and %inancial budgesupporting schedules&

Describe responsibility centers and responaccounting&e human aspects of budgeting


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'ntroduction"Budgeting is the most (idely used actool for planning and coorgani)ations&

A budget is the *uantitative e!press

proposed plan of action by managemefuture time period and an aid coordination and implementation of th


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Basic Terminologies

A budget:

's a #nancial or non#nancial e!pression of action for a speci#ed period

'denti#es the resources and commitments rachieve the organi)ation+s goals for an upcomi

Budgeting"

The process of preparing a budget ,obudgets- is called budgeting


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The Budgeting $rocess

Budgeting is an important part organi)ation+s entire planning process

Budgets are the #nancial culminapredictions and assumptions about achionly #nancial but also non#nancial g

objectives .on#nancial performance goals and o

may include throughput customer satdefect minimi)ation and on/time deliver


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Budgeting cont+d0

Budgets can help identify potential pro

achieving speci#ed organi)ational goobjectives&

By *uantifying potential di1culties andthem visible budgets can help managers to thin2 of (ays to overcom

di1culties before they are reali)ed&A (ell/prepared budget can also be an device to communicate objectives coand e!pectations to all organi)ational per


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Budgeting cont+d0

4uch communication promotes understandin

is to be accomplished ho( those accomplishto be achieved and the manner in (hich resto be allocated

$articipation in the budgeting process helps ta spirit of cooperation motivate employees

a feeling of team(or2& 5mployee participation is needed to

integrate necessary information from variouas (ell as to obtain individual managerial coto the resulting budget&


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Budgeting cont+d0

The budget sets the resource constrain(hich managers must operate for the ubudget period& Thus the budget becobasis for control/ling activities and usage&

The budgeting and planning procesconcerned (ith all organi)ational resoumaterial inventory supplies personfacilities and can be vie(ed from a long/short/term perspective&


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Characteristics of a budget

A good budget is characteri)ed by the follo(in

$articipation" involve as many people as dra(ing up a budget&

Comprehensiveness" embrace the (hole org

4tandards" base it on established staperformance&

%le!ibility" allo( for changing circumstances

%eedbac2 " constantly monitor performance&

Analysis of costs and revenues" this can be d

basis of product lines departments or cost c


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7hy Budgeting8

't is a vehicle of communication by mabout strategic plan to the entire organ

$rovides a frame(or2 for judging perfo9otivates employees and managers

4elf imposed participative budget

$romotes coordination and communicaBudgets force managers to thin2 aboplan for the future&


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7hy Budgeting8

$rovides a means of allocating resothose parts of the organi)ation (hecan be used most e3ectively&Can uncover potential bottlenec2sthey occur


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Strategic PlanStrategic Plan


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4trategic planning

9anagers (ho plan on a long/range basisyears- are engaged in strategic planning&

Top/level management performs this proc(ith the assistance of several 2ey sta3 me

4trategic planning is not concerned (itday operations although the strategic pfoundation on (hich short/term planning i


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4trategic planning

9anagers engaging in strategic should identify 2ey variables believthe direct causes of the achievementachievement of organi)ational goobjectives&

>ey variables can be internal ,uncontrol of management- or ,normally non/controllable by manag


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Master Budget

's a detailed and comprehensive analys

#rst year of the long range plan& 't is static in the sense that it is based o

level of output demand

't summari)ed the planned activitie

subunits of the organi)ation& 't embraces the impact of both opera

#nancing decisions&


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Master Budget

Operating decisions" deals (ith ho(use of the limited resources organi)ation&

%inancing decisions" deals (ithobtain the funds to ac*uireresources&


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Operating budgetOperating budget

,$ro#t plan-& & &,$ro#t plan-& & &%inancial budge%inancial budge

Master BudgetMaster Budget

%ocuses on the 'ncome%ocuses on the 'ncome

4tatement and supporting4tatement and supporting

schedules or budgetedschedules or budgeted

e!penses&e!penses&

Focuses on the efects thFocuses on the efects th

budget and other plans wbudget and other plans w

balancesbalances


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Continuous BudgetContinuous Budget

Rolling budgets...Rolling budgets...

are a common oare a common o

master budgets master budgets

add a month inadd a month in

uture as the mouture as the mo

just ended is dro just ended is dro


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Types of BudgetsTypes of Budgets

1999 2000 2001

Continuousor

Rolling Budget

This budget is usually a twelve-month

budget that rolls forward one month

as the current month is completed.

This budget is usually a twelve-month

budget that rolls forward one month

as the current month is completed.

L o n g R a n g e B u d g e t s

Capital budgets (ith ac*uthat normally cover sever

%inancial budgets (resource ac*u


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?/@@

Budge

Sta

Cash BudgetCash Budget

Sales of Services or GoodsSales of Services or Goods

EndingInventoryBudget

or! in "rocess

and #inishedGoods


or! in "rocess

and #inishedGoods

"roductionBudget

"roductionBudget

$irect%aterialsBudget

$irect%aterialsBudget

&&$irectLa'or

Budget

$irectLa'or

Budget

(verhead

Budget

(verhead

Budget


$irect %aterials


$irect %aterials

Budgeted Balance

SheetBudgeted Statement of Cash

#lo)s


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4top and Apply

'dentify the order in (hich the follo(ing bud

prepared"


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4ales Budget

The sales budget is the most important elemmaster budget as all other budget assumptionsthe sales forecasts in the budget&

The foundation and starting point for the mast

Determines the anticipated unit and Birr ,dolla

the budgeted income statement& 9ay also include a schedule of e!pected cash

(hich determines the amount of e!peccollections from customers for each period bae!pected collections pattern&


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4ales budget cont+d0

The sales budget is the only budget based on aof customer demand&

The sales budget (ill depend on the forecasting of a number of factors including"


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4ales Budget cont+d0&

4ales managers use this information to plan sa

mar2eting/related activities and to determine thuman physical and technical resource needs

Accountants use the information to determinecash receipts for the cash budget

'n general companies can made sales forecast

4ales 4ta3 9ar2et Researche Trend Analysis Delphi Techni*ues 5conometric Analysis


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C o C o

P a s t p a t t e r n s

P a s t p a t t e r n s

o f s a l e s

o f s a l e s

" s t i m a t e s m a d e

" s t i m

a t e s m a d e

B # s a l e s f o r c e

B # s a l e s f o r c e

$ e n e

r a l

$ e n e

r a l

e c o n

o m i c

e c o n

o m i c

c o n d

i t i o n s

c o n d

i t i o n s

Factors to Consider %hen Forecasting Factors to Consider %hen Forecasting

C h a n

C h a n & r m & r m

C h a n g e s i n

C h a n g e s i n

p r o d u c t m i '

p r o d u c t m i '

M a r ( e t

M a r ( e t

r e s e a r c h

r e s e a r c h

s t u d i e s

s t u d i e s

) d v e

r t i s i n

g

) d v e

r t i s i n

g

a n d s a l e s

a n d s a l e s

p

r o m o t i o n

p l a n

s

p r o m

o t i o n

p l a n

s


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5!ample on 4ales Budget

Company A is e!pecting to sell


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Re*uiredA& $repare a sales budget&

B& $repare a schedule of e!pectecollections from sales by monthtotal for the third *uarter&

C& Assume that the company (ill prbudgeted balance sheet as of 4e=& Determine the accounts receivathat date&


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$roduction Budget

The production budget is prepared after

budget& The production budget lists the number of

must be produced during each budget periosales needs and to provide for the desirinventory&

$roduction needs can be determined as follo(


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$roduction Budget

$roduction re*uirements for a peinFuenced by the desired level ofinventory&

'nventories should be carefully planned&

5!cessive inventories tie up funds anstorage problems& 'nsu1cient inventolead to lost sales or crash production e3ofollo(ing period&


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5!amples of $roduction Bud

ABC Corporation has just made its sales

and its mar2eting department estimatescompany (ill sell @=== units during thyear& 'n the past management has minventories of #nished goods at appro!immonth+s sale& The inventory at the sta

budget period is


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)dditional "'ercise on ProductionBudget

Additional 'llustration on $roduction Bu

http://example%202.doc/http://example%202.doc/


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Direct 9aterials Budget"

Determines the *uantity of direct ra(

that must be purchased each period anticipated production needs ,from the pbudget- and to provide for ade*uate direct ra( materials inventories&

Remember that ra( materials inventory include indirect materials& This budget aonly the direct materials portion of ra( inventory& The indirect materials paddressed as part of the overhead budget


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Direct 9aterials Budget"

The #rst step in the direct materials bud

convert units of #nished goods produdirect materials needed to produce tmultiplying the number of units producedirect materials re*uired to produce on#nished goods&

The #nal step in the direct materials bdetermine the cost of the direct purchased by multiplying the *uantitpurchased by the purchase price per unit


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*+R"C, M),"R+)- B*$",

*irect Material Purchase Budget Formula

http://direct%20material%20purcahse%20budget%20formula.doc/http://direct%20material%20purcahse%20budget%20formula.doc/


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5!ample on D9 Budget

Te!as $roducts has developed a very

electronic calculator& 5ach calculator re*uismall chips that cost Br @&== each and are from an overseas supplier& Te!as $rodprepared a production budget for the calc*uarters for ear @ and for the #rst *uarter

as follo(s" Year 2

Q1 Q2 Q3 Q

Budgeted Pdn in Calculator ==== ?====


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5!ample on D9 Budget cont

The inventory of the chips at the end of

must be e*ual to @=I of the follo(ing productions needs& There (ill be === hand to start the #rst *uarter of ear @&

Re*uired"

$repare direct materials budget for the *uarter and in total for ear @ including tamount of purchases for each *uarter anyear in total&


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Direct Labor Budget

Determines the direct labor hours and di

dollars re*uired each period to meet anproduction needs ,from the production bu

The indirect labor costs are addressed athe overhead budget&

Direct labor budget may be a3ected by costs inelastic supply of labor a minimumof hours to be (or2ed and otherre*uirements&


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5!amples on Direct Labor bu

*irect -abor Budget.doc

http://direct%20labor%20budget.doc/http://direct%20labor%20budget.doc/


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9anufacturing Overhead Bu

The manufacturing overhead budget

components K variable and #!ed overhea Budgeted variable overhead e!penses d

the number of units produced fproduction budget and a budgeted overhead cost per unit&

Budgeted #!ed overhead e!penses depthe total cost e!pected to be incurred type of #!ed overhead cost&


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9anufacturing Overhead Bu

Any noncash #!ed manufacturing overhe

such as depreciation e!pense is deducthe total manufacturing overhead to dthe cash disbursements for manuoverhead&

The cash (as spent (hen the deprecia(as ac*uired and not (hen the depreciated&-


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5!ample on 9anufacturing Overhead B

Company C+s variable manufacturing

rate is Br @&== per direct labor/hour company+s #!ed manufacturing overhe=@;= per *uarter& The only non/cashincluded in the #!ed overhead is depreBr


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5!ample on 9anufacturing Overhead B

Re*uired"

A& Construct company+s manufacturing budget for the year&

B& Compute the company+s manufacturing rates ,variable #!ed and total- for the ye


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4elling and Administrative 5!pense Bu

4elling and Administrative ,4JA- e!pense

similar to the manufacturing overhead budincludes variable and #!ed e!penses&

Budgeted variable 4JA e!penses depend on thof units sold or sales dollars from the sales bud

Budgeted #!ed 4JA e!penses depend on the

e!pected to be incurred for each type of #!ed 4 Any noncash #!ed 4JA costs such as de

e!pense is deducted from the total 4JA e!determine the cash disbursements for 4JA e!pe


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Cash Budget

Little is more important to business suc

e3ective cash management& 'f a company e!periences cash shortages

unable to pay its debts and may be foban2ruptcy&

'f e!cess cash accumulates a business

opportunity to earn investment income interest costs by repaying debt&

$reparing a cash budget alerts managanticipated cash shortages or e!cess cash b


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Cash Budget

The cash budget estimates the e!pected receipts ,inF

payments ,outFo(s- of cash for a period of time& 't summari)es the cash Fo( prospects of all transactio

considered in the master budget&

The information that the cash budget provides enableto plan for short/term loans (hen the cash balance is short term investments (hen the cash balance is high

A cash budget e!cludes planned noncash transactiodepreciation e!pense amorti)ation e!pense issuanceof stoc2 dividends uncollectible accounts e!pense anlosses on sales of assets&


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Cash Budget

The cash budget is composed of four majsections"


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Cash Budget

The cash budget uses information from other budgets"

Cash receipts from the sales budgetCash disbursement s from direct

budget cash disbursements from tlabor manufacturing overhead andadministrative e!pense budget&


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Cash Budget

The company may also have to meet a

balance re*uirement for its cash accounimposed by the ban2&

'f the cash balance falls short of the re*uired the company (ill have to borroto increase the cash balance to the minim

'f the company has cash in e!cess of the balance re*uired it is obligated to payoutstanding borro(ings and the relatedpayable&


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Cash Budget

After the borro(ings and interest have been

the company may leave the e!cessM cash inaccount&

The receipts section lists all of the case!cept from #nancing e!pected during thperiod& Nenerally the major source of receip

sales& The disbursements section summari)es

payments that are planned for the budgThese payments include D9 purchases dipayments 9OH costs and so on


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Cash Budget

The cash e!cess or de#ciency section is c

as follo(s"

'f a cash de#ciency e!ists during anperiod the company (ill need to borro(there is a cash e!cess during any budgefunds borro(ed in previous periods can

or the e!cess funds can be invested

Cash Balance Beginning

Add Receipts

Total Cash Available

Less Disbursement

5!cess ,de#ciency- of cash Available over Disbursement


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"'ample on Cash Budget

"'ample on Cash Budget.doc

http://example%20on%20cash%20budget.doc/http://example%20on%20cash%20budget.doc/


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Budgeted 'ncome 4tatement

A budgeted income statement can be

from the data developed in the operating budget&

The budgeted income statement is one oschedules in the budget process&

't sho(s the company+s planned pro#t anas a benchmar2 against (hich sucompany performance can be measured&


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Budgeted Balance 4heet

4tatements of #nancial position comestimate of #nancial position at the begthe budget period (ith the estimated roperations for the period ,from thestatements- and estimated changes in aliabilities&


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Budgeting and Responsibility Acco

To attain the goals described in the maste

a company must coordinate the e3orts employees from the top e!ecutive throughof management to every supervised (or2e

Coordinating the company+s e3ortsassigning responsibility to managers

accountable for their actions in plancontrolling human and other resources&

Ho( each company structures its o(n orgsigni#cantly shapes ho( the company+s e

be coordinated.


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Responsibility Accounting

Organi)ation structure is an arrangemen

of responsibility (ithin the organi)ation& 5ach manager regardless of level is in

a responsibility center&

A responsibility center is a part seg

subunit of an organi)ation (hose maaccountable for a speci#ed set of activiti The higher the manager+s level the bro

responsibility center and the larger the nhis or her subordinates&


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Responsibility Accounting J Cente

Responsibility accounting is a syst

measures the plans budgets actions aresults of each responsibility center&

%our types of responsibility centersfollo(s"


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Controllability Concept

The controllability concept is crucia

e3ective responsibility accounting system 9anagers should only be evaluated b

revenues or costs they control&

Holding individuals responsible for thicannot control is de/motivating&

'solating control ho(ever may be di1illustrated in the follo(ing case&


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Controllability

Controllability can be di1cult to determinbecause most items can be a3ected or inFthe actions of more than one manager anthe controllability of items depends to e!tent on the period being measured si

items are controllable in the long run& Responsibility accounting should focus #rst

to as2 for information and not on (hom to b


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5/Budgeting5/Budgeting

5mployees throughout an organi)ation can and retrieve budget information electronica

This tends to streamline the entire budgetinprocess&

5mployees throughout an organi)ation can sand retrieve budget information electronica

This tends to streamline the entire budgetinprocess&

?/

h i l f d


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Behavioral 'mpact of BudgetBehavioral 'mpact of Budget

The budgeting process may be abused bothsuperiors and subordinates leading to outcomes

Budgetary 4lac2 or $adding the Budget

$eople often perceive that their performance

better in their superiors+ eyes if they can budget&M

Budgetary 4lac2

The practice of underestimating budgeted roverestimating budgeted e!penses in an e3ort

resulting budgeted goals ,pro#ts- more easily att

?/

h i l f d


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Behavioral 'mpact of BudgetBehavioral 'mpact of Budget

4pending the budget is anothemanagers often feel if they do all the resources they receiveyear+s budget may be cut&

i i i d iP i i i B d i


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Participative BudgetingParticipative Budgeting?/

#lo) of Budget $ata#lo) of Budget $ata

S u p e r v i s o r S u p e r v i s o r

M i d d l eM a n a g e m e n t

S u p e r v i s o r S u p

M i d d l eM a n a g e m e

T o p M a n a g e m e n t

C ll bili


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Controllability

Controllability refers to the deinFuence that a manager has orevenues costs and other

items for (hich the manaresponsible&

,h " d,h " d


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,he "nd ,he "nd

Documents

Master Budget and Responisbiltiy.ppt