Week8 TheMasterBudget

The Master Budget
Chapter 7
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7-1
Advantages of Budgets
Budgets
Goals and objectives
A budget allows systematic rather than chaotic reaction to change.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
7-2
Advantages of Budgets
Compels managers to think ahead
Provides definite expectations that are the best framework to evaluate performance Aids managers in coordinating their efforts
7-3
Types of Budgets
Strategic plan Long-range plan
Capital budget
Master budget
Continuous budget
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7-4
Strategic Plan
The most forward-looking budget is the strategic plan, which sets the overall goals and objectives of the organization.
7-5
Long-Range Plan
The strategic plan leads to long-range planning, which produces forecasted financial statements for five- to ten-year periods.
7-6
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.
7-7
Master Budget
Sales The master budget summarizes the planned activities of all subunits of an organization. Production Distribution Finance
7-8
Continuous Budget
Rolling budgets...
are a common form of master budgets that add a month in the future as the month just ended is dropped.
7-9
Components of Master Budget
Operating budget
Financial/Cash budget
7 - 10
Steps in Preparing the Master Budget

The principal steps in preparing the master budget are:
1. Basic data a. Sales budget b. Cash collections from customers c. Purchases budget d. Disbursements for purchases e. Operating expense budget f. Disbursements for operating expenses
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7 - 11
Steps in Preparing the Master Budget

1. Basic data
2. Operating budget
3. Financial/Cash budget
7 - 12
Operating Budget
Sales budget Purchases budget Operating expenses budget Cash collections from customers Disbursements for purchases Disbursements for operating expenses
7 - 13
Cash Collections
It is easiest to prepare budgeted cash collections at the same time as the sales budget. Cash collections include the current months cash sales plus the previous months credit sales.
7 - 14
Purchases Budget
Beginning inventory + Budgeted purchases Cost of goods sold = Desired ending inventory
7 - 15
Disbursements for Purchases

For example, 50% of the current months purchases and 50% of the previous months purchases may be included. The total disbursements are then used in preparing the cash budget.
7 - 16
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.
7 - 17

Expenses driven by sales volume include sales commissions and many delivery expenses.
7 - 18

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
7 - 19
Operating Expense Disbursements

Disbursements for operating expenses are based on the operating expense budget.
7 - 20
Operating Expense Disbursements

For example, 50% of last months and this months wages and commissions plus miscellaneous and rent expenses may be included. The total of these disbursements is then used in preparing the cash budget.
7 - 21
Budgeted Income Statement

The income statement will be complete after addition of the interest expense, which is computed after the financial/ cash budget has been prepared. Budgeted income from operations is often a benchmark for judging management performance.
Financial/Cash Budget
The cash budget has the following major sections: available cash balance cash receipts disbursements cash needed from (or used for) financing ending cash balance
7 - 23
Available cash balance = Beginning cash balance Minimum cash balance desired. Cash receipts depend on collections from customers accounts receivable, cash sales, and on other operating income sources.
7 - 24
Cash disbursements for purchases depend on the credit terms extended by suppliers and the bill-paying habits of the buyer. Payroll depends on wage, salary, and commission terms and on payroll dates.
7 - 25
Disbursements for some costs and expenses depend on contractual terms for instalment payments, mortgage payments, rents, leases, and miscellaneous items.
Other disbursements include outlays for fixed assets, long-term investments, dividends, and the like.
Management determines the minimum cash balance desired depending on the nature of the business and credit arrangements.
7 - 27
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.
7 - 28
Beginning cash balance + Receipts Disbursements + Cash from financing = Ending cash balance
The cash from financing can be either positive (borrowing) or negative (repayment).
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.
7 - 30
Sales Forecast
A sales forecast is a prediction of sales under a given set of conditions.
Sales forecasts are usually prepared under the direction of the top sales executive.
7 - 31
Factors to Consider When Forecasting Sales

Past patterns of sales
Estimates made by the sales force

General economic conditions Competitors actions
7 - 32
Factors to Consider When Forecasting Sales

Changes in the firms prices
Changes in product mix

Market research studies Advertising and sales promotion plans
7 - 33
Getting Employees to Accept the Budget

To fully benefit from budgets, an organization needs the support of all the firms employees. The attitude of top management will heavily influence lower-level workers and managers attitudes.
7 - 34
Getting Employees to Accept 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.
7 - 35
Participative Budgeting
Budgets created with the active participation of all affected employees are generally more effective than budgets imposed on subordinates.
7 - 36
Exercise
Question:
Many non-profit organisations use budgets primarily to limit spending. Why does this limit the effectiveness of budgets? [This tests your knowledge of the many roles of budgets.]
7 - 39
Exercise
- Helps managers to plan ahead. - Provides definite expectations that are the best framework to evaluate performance - Aids managers in coordinating their efforts - A decision tool. It helps managers project the results of their decisions, thereby aiding them in making the right decisions. - Provides a base for adapting to change.

Week8 TheMasterBudget

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Week8 TheMasterBudget

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The Master Budget

Goals and objectives

A budget allows systematic rather than chaotic reaction to change.

Components of Master Budget

Steps in Preparing the Master Budget

Steps in Preparing the Master Budget

Disbursements for Purchases

Operating Expense Budget

Operating Expense Budget

Operating Expense Budget

Operating Expense Disbursements

Operating Expense Disbursements

Budgeted Income Statement

Budgeted Balance Sheet

Factors to Consider When Forecasting Sales

Estimates made by the sales force

Factors to Consider When Forecasting Sales

Changes in product mix

Getting Employees to Accept the Budget

Getting Employees to Accept the Budget

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