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Chapter 8 The Master Budget Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn
Learning Objectives  (1 of 2) <ul><li>Explain why budgeting is important </li></ul><ul><li>Describe how strategic planning...
Learning Objectives  (2 of 2) <ul><li>Explain why the cash budget is important in the master budgeting process </li></ul><...
Management Planning is the cornerstone of effective management
Terms <ul><li>Budgeting  - Formalizes plans and translates qualitative narratives into a documented, quantitative format <...
The Planning Process Budget Strategic Planning Tactical  Planning
Strategic Planning <ul><li>Long-term (5 to 10 years) </li></ul><ul><li>Top-level management </li></ul><ul><li>Long-range g...
Strategic Planning <ul><li>Effective strategic planning requires that managers build plans and budgets that integrate exte...
External Key Variables <ul><li>Competitor actions </li></ul><ul><li>U.S. market conditions </li></ul><ul><li>U.S. politica...
Tactical Plans <ul><li>Short-term (1 to 18 months) </li></ul><ul><li>Top and middle management </li></ul><ul><li>Specific ...
Budgets <ul><li>Communicate objectives, constraints, and expectations </li></ul><ul><li>Provide financial predictions  </l...
Budgeting <ul><li>Short-term </li></ul><ul><li>Top, middle, and operational management involvement </li></ul><ul><li>Usabl...
Planning Relationships Budget Top  Management Top and Middle  Management Top, Middle, and Operational Management Strategic...
The Control Phase <ul><li>Actual-to-budget comparisons </li></ul><ul><li>Determining and investigating variances </li></ul...
 
The Master Budget <ul><li>A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial stat...
 
The Master Budget Operating Budgets Financial Budgets Sales Budget Production Budget Purchases Budget Direct Labor Budget ...
The Operating Budget  Sales Budget
Sales Forecast <ul><li>Ask sales personnel </li></ul><ul><li>Extrapolate past trends </li></ul><ul><li>Use market research...
Sales Budget Units to be sold  * Selling price per unit = Dollars of sales
The Operating Budget  Sales Budget Production Budget
Production Budget <ul><li>Production manager combines </li></ul><ul><ul><li>Sales estimates </li></ul></ul><ul><ul><li>Beg...
Ending Inventory Policy <ul><li>Percentage of next period’s projected sales </li></ul><ul><li>Constant amount </li></ul><u...
Production Budget  Finished Good Units <ul><li>Units to be sold (from sales budget) </li></ul><ul><li>+ Desired ending inv...
The Operating Budget  Sales Budget Production Budget Purchases Budget
Purchases Budget <ul><li>Units to be produced (from production budget) </li></ul><ul><li>+ Desired ending inventory </li><...
The Operating Budget  Sales Budget Production Budget Direct Labor Budget Purchases Budget
Direct Labor Budget <ul><li>Total number of people </li></ul><ul><li>Specific types of workers  </li></ul><ul><li>Producti...
Direct Labor Budget <ul><li>Units to be produced (or DM components) </li></ul><ul><li>* Standard time allowed per unit </l...
The Operating Budget  Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget
Overhead Budget <ul><li>Identify activity base </li></ul><ul><li>Estimate overhead costs </li></ul><ul><li>Separate costs ...
Overhead Budget Predicted activity base * Variable overhead rate per unit of activity = Total variable overhead cost + Fix...
The Operating Budget  Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget Selling and Admi...
Selling and Administrative  Budget Predicted sales dollars (or other measure)  * Variable S&A rate per dollar = Total vari...
The Financial Budget  Operating Budget
The Financial Budget  Operating Budget Cash Budget
Cash Budget <ul><li>Highlights importance of cash for organization’s continued existence </li></ul><ul><li>Translates accr...
Cash Budget Beginning cash balance + Cash receipts (collections) = Cash available for disbursements - Cash disbursements =...
 
Cash Collections/Disbursements  <ul><li>Collections </li></ul><ul><ul><li>Sales  </li></ul></ul><ul><ul><ul><li>Cash  </li...
<ul><li>Receipts/Disbursements </li></ul><ul><li>From Jan Feb Mar Total </li></ul><ul><li>Nov </li></ul><ul><li>Dec </li><...
How to Improve Cash Flow <ul><li>Establish sound credit practices </li></ul><ul><li>Expedite fulfillment and shipping </li...
The Financial Budget  Operating Budget Cash Budget Capital Budget
Capital Budget <ul><li>Long-term fixed asset needs </li></ul><ul><ul><li>Plant </li></ul></ul><ul><ul><li>Equipment </li><...
The Financial Budget  Operating Budget Cash Budget Capital Budget Income Statement/COGMfg
The Financial Budget  Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings
The Financial Budget  Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings B...
The Financial Budget  Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings B...
Budgets Provide <ul><li>Guide to align activities and resources with organizational goals </li></ul><ul><li>Vehicle to pro...
Budgeting Provides <ul><li>Basis to sharpen responsiveness to internal and external factors </li></ul><ul><li>Model to vie...
Budgeting Terms <ul><li>Continuous  budgeting   </li></ul><ul><ul><li>12-month rolling budget </li></ul></ul>
Budgeting Terms <ul><li>Continuous budgeting   </li></ul><ul><li>Budget slack </li></ul><ul><ul><li>intentional underestim...
Budgeting Terms <ul><li>Continuous budgeting   </li></ul><ul><li>Budget slack </li></ul><ul><li>Participatory budget </li>...
Budgeting Terms <ul><li>Continuous budgeting   </li></ul><ul><li>Budget slack </li></ul><ul><li>Participatory budget </li>...
Activity Budget <ul><li>Connect line items in budget to list of activities </li></ul><ul><li>Raise awareness of non-value-...
Budget Manual <ul><li>Statements of budgetary purpose and its desired results </li></ul><ul><li>Listing of specific budget...
Questions <ul><li>How are strategic and tactical planning related to budgeting? </li></ul><ul><li>In what order are the ma...
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  1. 1. Chapter 8 The Master Budget Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn
  2. 2. Learning Objectives (1 of 2) <ul><li>Explain why budgeting is important </li></ul><ul><li>Describe how strategic planning is related to budgeting </li></ul><ul><li>Identify the starting point of a master budget and explain why it is the starting point </li></ul><ul><li>Prepare various master budget schedules and explain how they relate to one another </li></ul>
  3. 3. Learning Objectives (2 of 2) <ul><li>Explain why the cash budget is important in the master budgeting process </li></ul><ul><li>List the benefits provided by a budget </li></ul><ul><li>(Appendix) Explain how a budget manual facilitates the budgeting process </li></ul>
  4. 4. Management Planning is the cornerstone of effective management
  5. 5. Terms <ul><li>Budgeting - Formalizes plans and translates qualitative narratives into a documented, quantitative format </li></ul><ul><li>Budget - Expresses a commitment to planned activities and resource acquisition and use </li></ul>
  6. 6. The Planning Process Budget Strategic Planning Tactical Planning
  7. 7. Strategic Planning <ul><li>Long-term (5 to 10 years) </li></ul><ul><li>Top-level management </li></ul><ul><li>Long-range goals, strategies, and policies </li></ul><ul><li>Foundation for short-term planning </li></ul><ul><li>Identify and gather information on key variables, both internal and external </li></ul>Strategic Planning
  8. 8. Strategic Planning <ul><li>Effective strategic planning requires that managers build plans and budgets that integrate external considerations and influences with internal factors </li></ul>Strategic Planning
  9. 9. External Key Variables <ul><li>Competitor actions </li></ul><ul><li>U.S. market conditions </li></ul><ul><li>U.S. political/regulatory climate </li></ul><ul><li>Emerging technology issues </li></ul><ul><li>Consumer trends and attitudes </li></ul><ul><li>International market conditions </li></ul><ul><li>Demographics </li></ul><ul><li>International political/regulatory climate </li></ul>Strategic Planning
  10. 10. Tactical Plans <ul><li>Short-term (1 to 18 months) </li></ul><ul><li>Top and middle management </li></ul><ul><li>Specific objectives and means to achieve strategic plans </li></ul><ul><li>Basis against which results can be measured </li></ul>Tactical Planning
  11. 11. Budgets <ul><li>Communicate objectives, constraints, and expectations </li></ul><ul><li>Provide financial predictions </li></ul><ul><li>Provide nonfinancial performance goals and objectives </li></ul><ul><li>Identify potential difficulties </li></ul><ul><li>Determine resource allocation and constraints </li></ul><ul><li>Permit control through budget-to-actual comparisons </li></ul>Budget
  12. 12. Budgeting <ul><li>Short-term </li></ul><ul><li>Top, middle, and operational management involvement </li></ul><ul><li>Usable guidelines to implement strategic and tactical plans </li></ul><ul><li>Allocates resources </li></ul><ul><li>Standard against which performance can be measured </li></ul>Budget
  13. 13. Planning Relationships Budget Top Management Top and Middle Management Top, Middle, and Operational Management Strategic Planning Tactical Planning
  14. 14. The Control Phase <ul><li>Actual-to-budget comparisons </li></ul><ul><li>Determining and investigating variances </li></ul><ul><li>Corrective action </li></ul><ul><li>Feedback to operating managers </li></ul>Budget
  15. 16. The Master Budget <ul><li>A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements </li></ul><ul><li>For a specific period of time </li></ul><ul><li>Static – based on a single level of output demand </li></ul><ul><li>Interactive – departments generate and consume information </li></ul>
  16. 18. The Master Budget Operating Budgets Financial Budgets Sales Budget Production Budget Purchases Budget Direct Labor Budget Overhead Budget Selling & Administrative Budget Cash Budget Capital Expenditures Budget Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Budget
  17. 19. The Operating Budget Sales Budget
  18. 20. Sales Forecast <ul><li>Ask sales personnel </li></ul><ul><li>Extrapolate past trends </li></ul><ul><li>Use market research </li></ul><ul><li>Employ statistical models and simulation </li></ul>Sales Forecast
  19. 21. Sales Budget Units to be sold * Selling price per unit = Dollars of sales
  20. 22. The Operating Budget Sales Budget Production Budget
  21. 23. Production Budget <ul><li>Production manager combines </li></ul><ul><ul><li>Sales estimates </li></ul></ul><ul><ul><li>Beginning inventory targets </li></ul></ul><ul><ul><li>Ending inventory targets </li></ul></ul><ul><li>Determines the types, quantities, and timing of products to be manufactured </li></ul>
  22. 24. Ending Inventory Policy <ul><li>Percentage of next period’s projected sales </li></ul><ul><li>Constant amount </li></ul><ul><li>Increasing amount </li></ul><ul><li>Near-zero in just-in-time systems </li></ul><ul><li>Cost of holding inventory includes storage, insurance, obsolescence, shrinkage, damage </li></ul>
  23. 25. Production Budget Finished Good Units <ul><li>Units to be sold (from sales budget) </li></ul><ul><li>+ Desired ending inventory </li></ul><ul><li>= Total units needed during period </li></ul><ul><li>- Units in beginning inventory </li></ul><ul><li>= Units to be produced </li></ul>
  24. 26. The Operating Budget Sales Budget Production Budget Purchases Budget
  25. 27. Purchases Budget <ul><li>Units to be produced (from production budget) </li></ul><ul><li>+ Desired ending inventory </li></ul><ul><li>= Total needed </li></ul><ul><li>- Beginning inventory </li></ul><ul><li>= Units for which purchases are required </li></ul><ul><li>* Quantity required per unit </li></ul><ul><li>= Quantity to purchase </li></ul><ul><li>* Price per pound </li></ul><ul><li>= Total cost of purchases </li></ul>
  26. 28. The Operating Budget Sales Budget Production Budget Direct Labor Budget Purchases Budget
  27. 29. Direct Labor Budget <ul><li>Total number of people </li></ul><ul><li>Specific types of workers </li></ul><ul><li>Production hours needed </li></ul><ul><li>Costs </li></ul><ul><ul><li>Union contracts </li></ul></ul><ul><ul><li>Minimum wage laws </li></ul></ul><ul><ul><li>Fringe benefit costs </li></ul></ul><ul><ul><li>Payroll taxes </li></ul></ul>
  28. 30. Direct Labor Budget <ul><li>Units to be produced (or DM components) </li></ul><ul><li>* Standard time allowed per unit </li></ul><ul><li>= Standard labor time allowed </li></ul><ul><li>* Per hour direct labor cost </li></ul><ul><li>= Total direct labor cost </li></ul>
  29. 31. The Operating Budget Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget
  30. 32. Overhead Budget <ul><li>Identify activity base </li></ul><ul><li>Estimate overhead costs </li></ul><ul><li>Separate costs as fixed or variable </li></ul><ul><li>Show total costs for operating budgets </li></ul><ul><li>Show costs without depreciation for cash budgets </li></ul>
  31. 33. Overhead Budget Predicted activity base * Variable overhead rate per unit of activity = Total variable overhead cost + Fixed overhead cost = Total overhead cost = Total cost without depreciation
  32. 34. The Operating Budget Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget Selling and Admin Budget
  33. 35. Selling and Administrative Budget Predicted sales dollars (or other measure) * Variable S&A rate per dollar = Total variable overhead cost + Fixed S&A cost = Total S&A cost = Total cost without depreciation
  34. 36. The Financial Budget Operating Budget
  35. 37. The Financial Budget Operating Budget Cash Budget
  36. 38. Cash Budget <ul><li>Highlights importance of cash for organization’s continued existence </li></ul><ul><li>Translates accrual-based information into cash flows </li></ul><ul><li>Indicates effectiveness of credit practices </li></ul><ul><li>Allows for planned cash borrowing or investing </li></ul><ul><li>Used to prepare pro forma Cash Flow Statement </li></ul>
  37. 39. Cash Budget Beginning cash balance + Cash receipts (collections) = Cash available for disbursements - Cash disbursements = Cash excess or deficiency - Minimum desired cash balance = Cash needed/available for investment or loan repayment +/- Various financing measures = Ending cash balance
  38. 41. Cash Collections/Disbursements <ul><li>Collections </li></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><ul><li>Cash </li></ul></ul></ul><ul><ul><ul><li>Accounts Receivable </li></ul></ul></ul><ul><li>Disbursements </li></ul><ul><ul><li>Purchases </li></ul></ul><ul><ul><ul><li>Cash </li></ul></ul></ul><ul><ul><ul><li>Accounts Payable </li></ul></ul></ul>
  39. 42. <ul><li>Receipts/Disbursements </li></ul><ul><li>From Jan Feb Mar Total </li></ul><ul><li>Nov </li></ul><ul><li>Dec </li></ul><ul><li>Jan </li></ul><ul><li>Feb </li></ul><ul><li>Mar </li></ul><ul><li>Total </li></ul>Cash Collections/Disbursements Reduced by discounts and estimated uncollectible accounts Percentage of cash received/paid during the month
  40. 43. How to Improve Cash Flow <ul><li>Establish sound credit practices </li></ul><ul><li>Expedite fulfillment and shipping </li></ul><ul><li>Bill promptly and accurately </li></ul><ul><li>Offer discounts for prompt payments </li></ul><ul><li>Aggressively follow up on past due accounts </li></ul><ul><li>Deposit payments promptly </li></ul><ul><li>Seek better payment terms from suppliers/banks </li></ul><ul><li>Keep tight control of inventory </li></ul><ul><li>Review and reduce expenses </li></ul><ul><li>Pay bills on time but never before they are due </li></ul>NY State Society CPAs
  41. 44. The Financial Budget Operating Budget Cash Budget Capital Budget
  42. 45. Capital Budget <ul><li>Long-term fixed asset needs </li></ul><ul><ul><li>Plant </li></ul></ul><ul><ul><li>Equipment </li></ul></ul><ul><li>Payment points </li></ul>
  43. 46. The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/COGMfg
  44. 47. The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings
  45. 48. The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings Balance Sheet
  46. 49. The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/COGMfg Statement of Retained Earnings Balance Sheet Statement of Cash Flows
  47. 50. Budgets Provide <ul><li>Guide to align activities and resources with organizational goals </li></ul><ul><li>Vehicle to promote employee participation, cooperation, and departmental coordination </li></ul><ul><li>Tool to enhance planning, controlling, problem solving, and evaluating </li></ul>Budget
  48. 51. Budgeting Provides <ul><li>Basis to sharpen responsiveness to internal and external factors </li></ul><ul><li>Model to view future performance and consider alternative measures </li></ul><ul><li>Benchmark to judge organizational effectiveness and efficiency </li></ul>Budget
  49. 52. Budgeting Terms <ul><li>Continuous budgeting </li></ul><ul><ul><li>12-month rolling budget </li></ul></ul>
  50. 53. Budgeting Terms <ul><li>Continuous budgeting </li></ul><ul><li>Budget slack </li></ul><ul><ul><li>intentional underestimation of revenue </li></ul></ul><ul><ul><li>intentional overestimation of expenses </li></ul></ul>
  51. 54. Budgeting Terms <ul><li>Continuous budgeting </li></ul><ul><li>Budget slack </li></ul><ul><li>Participatory budget </li></ul><ul><ul><li>developed by top management and operating personnel </li></ul></ul>
  52. 55. Budgeting Terms <ul><li>Continuous budgeting </li></ul><ul><li>Budget slack </li></ul><ul><li>Participatory budget </li></ul><ul><li>Imposed budgets </li></ul><ul><ul><li>developed by top management </li></ul></ul><ul><ul><li>imposed on operating personnel </li></ul></ul>
  53. 56. Activity Budget <ul><li>Connect line items in budget to list of activities </li></ul><ul><li>Raise awareness of non-value-added activities </li></ul><ul><li>Question and reduce non-value-added costs </li></ul>Budget
  54. 57. Budget Manual <ul><li>Statements of budgetary purpose and its desired results </li></ul><ul><li>Listing of specific budgetary activities to be performed </li></ul><ul><li>Calendar of scheduled budgetary activities </li></ul><ul><li>Sample of budgetary forms </li></ul><ul><li>Original, revised, and approved budgets </li></ul>
  55. 58. Questions <ul><li>How are strategic and tactical planning related to budgeting? </li></ul><ul><li>In what order are the master budget schedules prepared? </li></ul><ul><li>Why is the cash budget important in the master budgeting process? </li></ul>
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