Chapter 5: Master Budgets

budget

a financial “plan” that managers use to coordinate a business’s activities

managers use budgets to:

• develop strategies

• plan and budget for specific actions to achieve goals

• implement plans

• take corrective action

budgeting objectives

• develop strategies

• plan

• direct

• control

budgeting “benefits”

• requires managers to plan for the company’s future

• coordinates a company’s activities

• provides a benchmark that motivates employees and helps managers evaluate performance

• facilitates coordination and communication

• provide a benchmark that motivates employees and helps managers evaluate performance

benchmarking

the practice of comparing a company with its prior performance or with best practices from other companies

Participative budget

a budgeting process where those individuals who are directly impacted by a budget are involved in the development of the budget (bottom-up approach)

• these budgets tend to be achievable because those who are directly impacted by the budget help to create the plan

managers must:

• support the budget

• show employees how budgets can help them achieve better results

• require that employees participate in developing the budget

budgetary games:

• budgetary slack

• “spend it or lose it”

budgetary slack

occurs when managers intentionally understate expected revenues or overstate expected expenses

zero-based budget (ZBB)

all revenues and expenses must be justified for each new period

• previous year’s actual results are ignored under this approach

strategic budget

a long-term financial plan used to coordinate the activities needed to achieve the long-term goals of the company

operational budget

a short-term financial plan used to coordinate the activities needed to achieve the short-term goals of the company

continuous budget

a type of operational budget that involves continuously adding one additional month as each month goes by

static budget

a budget prepared for only one level of sales volume

flexible budget

a budget prepared for various levels of sales volume

master budget

a set of budgeted financial statements and supporting schedules for an entire organization

three types of budgets included in the master budget:

1. the operating budget

2. the capital budget

3. the financial budget

operating budget

a set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into the cash budget and then the budgeted financial statements

capital expenditures budget

presents a company’s plan for purchasing long-term assets

financial budget

includes the cash budget and the budgeted financial statements

cash budget

details how the business expects to go from the beginning cash balance to the desired ending cash balances

master budget includes the following budgets:

• sales budget

• production budget

• direct materials budget

• direct labor budget

• manufacturing overhead budget

• cost of goods sold budget

• selling and administrative expense budget

sales budget

the forecast of sales revenue is the “cornerstone” of the master budget

production budget

the basis for product costs budgets: direct materials budget, direct labor budgets, and manufacturing overhead budgets

production budget calculation

direct material budget

estimates the amount of materials to purchase to meet the company’s production needs

direct materials budget calculation

direct labor budget

estimates the direct labor hours and related cost needed to support the production budget

manufacturing overhead budget

estimates the variable and fixed manufacturing overhead deeded to meet the company’s production needs

predetermined overhead allocation rate =

total estimated overhead costs / total estimated quantity of the overhead allocation base

cost of goods sold budget

estimates the cost of goods sold based on the company’s projected sales

the cost accountant works with the office and sales managers to develop the ___________

selling and administrative expense budget

selling and administrative expense budget

estimates the selling and administrative expenses needed to meet the company’s projected sales

financial budgets include:

• the cash budget

• the budgeted financial statements

  • budgeted income statement

  • budgeted balance sheet

  • budgeted statement of cash flows

Capital expenditures budget (CAPEX)

• the purchase of long-term assets is part of a strategic plan

capital expenditures are purchases of long-term assets, such as:

• delivery trucks

• computer systems

• office furniture

• manufacturing equipment

• land

cash budget

pulls information from the other budgets previously prepared

cash budget has three sections:

• cash receipts

• cash payments

• short-term financing

cash payments

• capital expenditures

• product costs

  • direct materials purchases

  • direct labor costs

  • manufacturing overhead costs

• selling and administrative expenses

inventory, purchases, and cost of goods sold budget

• the cost of goods sold computation shows the relationship between inventory, purchases, and ending inventory:

  • beginning merchandise inventory + purchases - ending merchandise inventory = COGS

• the equation can be rearranged to find the amount of purchases required:

  • purchases = COGS + desired ending merchandise inventory - beginning merchandise inventory

budgets for a merchandising company include:

• capital expenditures budget

• cash budget

• budgeted income statement

• budgeted balance sheet

short-term financing

companies often borrow funds to maintain a minimum cash balance

sensitivity analysis

• technology can make it more cost effective to conduct sensitivity analysis

• sensitivity analysis is a “what if” technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes

• sensitivity analysis provides a better understanding of how changes in sales and costs are likely to affect the company’s bottom line

examples of how companies use data analytics:

• help with sales forecasting and financial planning

• drive growth and operational efficiency

• establish budgets and monitor them against actual results