ACCT Chapter 9 The Master Budget

Strategic Planning

Long-term goals, strategies, and policies set for 5-10 years.

Steps for Translating the Strategic Plan into Budgets

1. Develop a strategic plan.

2. Translate the strategic plan into long-term and short-term objectives.

3. From the objectives, develop short-term plans.

4. Develop budgets based upon the short-term plans.

5. Compare the actual results with the budgeted (planned) amounts.

6. Take corrective action, if necessary.

Budget

A formal written statement of management's realistic plan for the future expressed in financial terms.

Benefits of using budgets

1. Plan ahead

2. Definite objectives

3. Early warning system

4. Coordination of activities

5. Greater management awareness

6. Motivates personnel

Remember, a ____________ to management, not a substitute for management.

budget is an aid

Time length for a budget

Most common budget period is one year, usually broken down into quarterly and/or monthly budgets.

Rolling Budget (Continuous Budget)

a moving twelve-month budget.

Goal Congruence

the manager's personal goals are congruent or consistent or aligned with the firm's goals.

Variance

the difference between actual and budgeted figures that is used to evaluate how well the manager controlled operations during the period.

Participating budgeting (Bottom up)

many levels of management help create budget

Dysfunctional behavior

the manager's behavior is in conflict with the firm's goals

Budgetary slack

The "padding" of the budget is done by a manager who deliberately underestimates revenues or overestimates costs.

Master Budget

a comprehensive financial plan of action consisting of interrelated budgets (operating and financial budgets) for a specified time period.

Operating budgets

budgets concerned with income-generating activities.

Financial Budgets

Budgets concerned with cash flows and financial position at the end of the period

Budget committees

are committees that review submitted budgets, make revisions, and approve the final budgets.

Flexible budgets

the master budget "flexed" to different levels of activity for "what if" scenarios

Zero-based budgeting: firms build budgets from scratch and must justify each budget line item.

Operating Budgets: Sales Budget and Cash Collections Schedule

- First budget prepared

- All other budgets depend Sales Budget (Forecast)

- Derived from the sales forecast, management's best estimate of sales revenue for the budget period

- # units expected to be sold and $ Sales Revenues each month or quarter, broken down between cash and credit sales.

Operating Budgets: Production Budget

· Shows the units that must be produced to meet anticipated sales

· Derived from Sales Budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units)

Safety stock

An extra inventory of finished goods that is kept on hand in case demand is higher than predicted or problems in the factory slow down production.

Production Budget Formula:

Expected unit sales + Desired End Finished Goods - Begin Finished Goods =

Operating Budgets: Direct Materials Budget or Raw Material Budget

· Shows both the quantity and cost of direct materials to be purchased

· Derived from Production Budget plus the desired change in ending DM

DM Budget Formula:

# units to be produced x DM per unit = # DM units needed for production + Desired end DM inventory (in units) - Begin DM inventory (in units) = # DM units to be Purchased x $ cost per DM unit =

Operating Budgets: Direct Labor Budget

· Shows both the quantity and cost of direct labor

· Derived from Production Budget

DL Budget Formula

# units to be produced x Direct Labor hours per unit = # Direct Labor hours needed x $ cost per DLH =

Operating Budgets: Manufacturing Overhead Budget

· Shows the expected MOH cost for the budget period

· Derived from Production Budget and splits MOH into variable and fixed costs

· Variable MOH rates are usually per activity not per unit. So we must convert them to a per unit basis.

MOH Budget Formula

# units to be produced x Variable MOH rate per unit = $ variable MOH + Fixed MOH =

Operating Budgets: Operating Expenses (Selling & Administrative) Budget

· Shows the budgeted operating expenses

· Derived from Sales Budget and splits Operating Expense into variable and fixed costs

Operating Budgets: Cost of Goods Sold Budget

· Shows the budgeted manufacturing cost per unit:

o DM per unit

o DL per unit

o MOH per unit

Budgeted COGS Formula:

DM cost per unit

+DL cost per unit

+Variable MOH cost per unit

+Fixed MOH cost per unit

Operating Budgets: Budgeted Income Statement

Combines the information of all the operating budgets.

Budgeted Income Statement Formula:

Sales

- COGS

----------

Gross Profit

- Operating Expenses

-------------------------

Income Before Taxes

- Tax Expense

--------------------

Financial Budgets: Cash Payments Budget

· Includes expected cash payments for direct materials and labor, taxes, dividends, plant assets, etc.