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- 1. Cost Accounting Seventeenth Edition,Global Edition Chapter 6 Master Budget and Responsibility Accounting Copyright © 2021 Pearson Education Ltd.
- 2. Copyright © 2021Pearson Education Ltd. Budget Defined • A budget is the quantitative expression of a proposed plan of action by management for a specified period. • A budget is an aid to coordinating what needs to be done to implement that plan. • A budget generally includes both the plan’s financial and nonfinancial aspects and serves as a road map for the company to follow in an upcoming period. • A financial budget quantifies managers’ expectations regarding a company’s income, cash flows, and financial position in a future period via a budgeted income statement, a budgeted statement of cash flows, and a budgeted balance sheet.
- 3. Copyright © 2021Pearson Education Ltd. Budgets Help Managers…. • Communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace. • Measure performance by comparing financial results against planned objectives, activities, and timelines to learn about potential problems. • Motivate employees to achieve their goals.
- 4. Copyright © 2021Pearson Education Ltd. Strategic Plans and Operating Plans (1 of 2) Budgeting is most useful when it is integrated with a company’s strategy. Strategy specifies how an organization matches its capabilities with the opportunities in the marketplace to accomplish its objectives.
- 5. Copyright © 2021Pearson Education Ltd. Strategic Plans and Operating Plans (2 of 2) To develop successful strategies, managers must consider questions such as the following: 1. What are our objectives? 2. How do we create value for our customers while distinguishing ourselves from our competitors? 3. Are the markets for our products local, regional, national, or global? 4. What trends affect our markets? 5. How do the economy, our industry, and our competitors affect us? 6. What organizational and financial structures serve us best? 7. What are risks and opportunities of alternative strategies and what are our contingency plans if our preferred plan fails?
- 6. Copyright © 2021Pearson Education Ltd. Strategy, Planning, and Budgets Exhibit 6.1 Strategy, Planning, and Budgets
- 7. Copyright © 2021Pearson Education Ltd. Budgeting Cycle 1. Before the start of a fiscal year, managers at all levels take into account past performance, market feedback, and anticipated future changes to initiate plans for the next period. 2. Senior managers give subordinate managers a frame of reference, a set of specific financial or nonfinancial expectations, against which they will compare actual results. 3. Managers and management accountants investigate any deviations from the plan.
- 8. Copyright © 2021Pearson Education Ltd. Working Document: Master Budget The master budget is at the core of the budgeting process. It expresses management’s operating and financial plans for a specified period. – Operating Budget—Operating decisions on how to best use the limited resources of an organization. – Financial Budget—Financial decisions on how to obtain the funds to acquire those resources.
- 9. Copyright © 2021Pearson Education Ltd. Advantages of Budgets Budgets are an integral part of management control systems. As we have discussed at the start of this chapter, when administered thoughtfully by managers, budgets do the following: 1. Promote coordination and communication among subunits within the company 2. Provide a framework for judging performance and facilitating learning 3. Motivate managers and other employees
- 10. Copyright © 2021Pearson Education Ltd. Challenges in Administering a Budget • The budgeting process is time-consuming. Estimates suggest that senior managers spend between 10% and 20% of their time on budgeting, and financial planning departments spend as much as 50% of their time on it. • For most organizations, the annual budget process is a months-long exercise that consumes a tremendous amount of resources.
- 11. Copyright © 2021Pearson Education Ltd. Time Coverage of Budgets • The most frequently used budget period is one year. • Businesses may also use a rolling budget. This budget is always available for a specified future period, by continually adding a month, quarter, or year to the period just ended.
- 12. Copyright © 2021Pearson Education Ltd. Operating Budget and Financial Budget The operating budget begins with the Revenues budget, includes multiple schedules, and concludes with the Budgeted Income Statement. The financial budget is made up of the Capital Expenditure budget, the Cash budget, the Budgeted Balance Sheet, and the Budgeted Statement of Cash Flows.
- 13. Copyright © 2021Pearson Education Ltd. Basic Operating Budget Steps (1 of 2) 1. Prepare the revenues budget (schedule 1; the starting point). 2. Prepare the production budget (schedule 2; in units). 3. Prepare the direct materials usage budget and direct materials purchases budget (schedule 3). 4. Prepare the direct manufacturing labor costs budget (schedule 4).
- 14. Copyright © 2021Pearson Education Ltd. Basic Operating Budget Steps (2 of 2) 5. Prepare the manufacturing overhead costs budget (schedule 5). 6. Prepare the ending inventories budget (schedule 6A, units; schedule 6B, dollars). 7. Prepare the cost of goods sold budget (schedule 7). 8. Prepare the nonmanufacturing costs budget (schedule 8). 9. Prepare the budgeted income statement (Exhibit 6-3).
Editor's Notes
- #2 If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) Math Type Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available)
- #3 A budget is the quantitative expression of a proposed plan of action by management for a specified period, and also works as an aid to coordinating what needs to be done to implement that plan. A budget generally includes the plan’s both financial and nonfinancial aspects.
- #4 Budgets serve many purposes for firms including those seen here: Communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace. Measure performance by comparing financial results against planned objectives, activities, and timelines to learn about potential problems. Motivate employees to achieve their goals.
- #5 Strategy specifies how an organization matches its capabilities with the opportunities in the marketplace to accomplish its objectives. A company can have a strategy of providing quality products or services at a low price, or a strategy of providing a unique product or service that is priced higher than the products or services of competitors. Budgeting is most useful when it is integrated with a company’s strategy.
- #6 As managers work to develop successful strategies, they must consider various questions including the risks and opportunities of alternative strategies, contingency plans if the preferred plan fails, how the economy, industry and competitors affect the business as well as, and in addition to, the questions shown here: To develop successful strategies, managers must consider questions such as the following: What are our objectives? How do we create value for our customers while distinguishing ourselves from our competitors? Are the markets for our products local, regional, national, or global? What trends affect our markets? How do the economy, our industry, and our competitors affect us? What organizational and financial structures serve us best? What are risks and opportunities of alternative strategies and what are our contingency plans if our preferred plan fails?
- #7 This slide shows an illustrated of view of the relationship among strategy, planning, and budgets.
- #8 These three steps describe the ongoing budget-related processes. The working document at the core of this process is called the master budget. In the next slide, we’ll take a closer look at the master budget.
- #9 The master budget is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions managers make as they prepare the budget.
- #10 When administered thoughtfully by managers, budgets do the following: Promote coordination and communication among subunits within the company Provide a framework for judging performance and facilitating learning Motivate managers and other employees
- #11 There are several challenges in administering a budget. Among them is the time commitment a thoughtfully administered budget requires.
- #12 The motive for creating a budget should guide a manager in choosing the period for the budget. As an example, if the purpose for the budget is cash-flow, you may look at a 6-month horizon whereas if you are looking at profitability of a new product line, you may need to look 3-years into the future.
- #13 The operating budget begins with the Revenues budget, includes multiple schedules and concludes with the Budgeted Income Statement. The financial budget is made up of the Capital Expenditure budget, the Cash budget, the Budgeted Balance Sheet, and the Budgeted Statement of Cash Flows.
- #14 The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals. The logical next step is to plan the production so that the product is available when customers need it. The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget. To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
- #15 The next schedule to be created (schedule #5) is the manufacturing overhead costs budget. Managing overhead costs is both challenging and important because of the required understanding of the activities required for production and the cost driver of those activities. Inventories are essential for proper customer service and play an important role in the determination of the budget. Recall that the production budget included a determination of the target ending finished goods inventory. Cost of Goods Sold is calculated by adding additional production costs to beginning finished goods inventory and then subtracting ending finished goods inventory. Non-manufacturing costs are included in the operating expense budget. Formats differ for the budgeted income statement but generally, information from schedules 1, 7, and 8 are used to generate the budgeted income statement.