MASTER BUDGETING AND
RESPONSIBILITY ACCOUNTING
Budgeting
A budget is a detailed plan, expressed in
quantitative terms, that specifies how resources
will be acquired and used during a given period of
time.
It is a quantified plan of action.
Key Purposes of the Budgeting System
The five primary purposes are:
1. Planning.
2. Facilitating Communication and Coordination.
3. Allocating Resources.
4. Managing Financial and Operational
Performance.
5. Evaluating Performance and Providing
Incentives.
Types of Budgets
Master budget (profit plan)
a comprehensive profit plan that covers all phases of
an organization’s operation.
Pro-forma (projected) financial statements
similar to historical statements, except that they
project the future.
Capital budget
Focuses on the acquisition of long-term assets
Types of Budgets
Some components of a master budget:
Sales budget
Production budget
Selling, general and administrative expense budget
R&D budget
Customer service budget
Projected financial statements:
Budgeted income statement
Budgeted balance sheet
Budgeted statement of cash flows
Organizations Use Many Types of
Budgets
Organization Individual
Organization Long-range Individual goals
goals strategic plan and values
Anticipated Individual
conditions beliefs
Master
budget
Strategic Actual period Performance
evaluation results evaluation
The Master Budget as a Planning Tool
After organization goals, strategies and
long-range plans have been developed,
work begins on the master budget.
A master budget is a comprehensive profit
plan that covers all phases of an company’s
operation for the coming periods.
Sales Forecast
Sales Forecasting the process of predicting sales
of services or goods.
The master budget begins with a sales forecast.
Items to consider in sales forecasts:
Past sales levels and trends
General economic conditions
Industry trends
Company pricing policies
Action of competitors
New products
Sales Budget
Sources of sales forecast data:
Sales Staff -- close to customer needs.
Market research -- can predict long-term trends in
attitudes and the effects of social and economic
changes on the company’s sales, potential markets
and products.
Operational Budgets
Manufacturing firms :
Direct material budget
Direct labor budget
Overhead budget
Selling, General & Administrative (SGA) budget
Merchandising firms
Merchandise purchases budget
.SGA budget
Service-industry firms
Based on the sales budget for its services, a set of
budgets is developed for the resources to be used in
providing the services.
Operational Budgets
Every business prepares a . . .
1. Cash budget
2. Capital expenditures budget, and a
3. Summary of operational budgets
Sales
Sales of
of Services
Services or
or Goods
Goods
Ending
Ending
Inventory
Inventory Production
Production
Budget
Budget Budget
Budget
Work
Work in
in Process
Process
and
and Finished
Finished
Goods
Goods
Ending
Ending Direct
Direct Direct
Direct Selling
Selling and
and
Overhead
Overhead
Inventory
Inventory Materials
Materials Labor
Labor Administrative
Administrative
Budget
Budget Budget Budget Budget
Budget
Budget Budget Budget
Budget
Direct
Direct Materials
Materials
Cash
Cash Budget
Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
International Aspects of Budgeting
Firms with international operations face a variety of
additional challenges in preparing their budgets . . .
1.
1. Translation
Translation of
of foreign
foreign currencies
currencies into
into local
local
currency.
currency.
2.
2. Budget
Budget preparation
preparation isis difficult
difficult when
when inflation
inflation (or
(or
deflation)
deflation) is
is high
high or
or unpredictable.
unpredictable.
3.
3. The
The economies
economies of of all
all countries
countries fluctuate
fluctuate inin
terms
terms ofof consumer
consumer demand,
demand, availability
availability of
of
skilled
skilled labor,
labor, and
and laws
laws affecting
affecting commerce.
commerce.
Activity-Based Budgeting
Activity-based budgeting (ABB) is the process of
developing a master budget using information obtained
from an activity-based costing (ABC) analysis
Resources
Resources
Activities
Activities
Forecast
Forecast of
of products
products and
and
services
services to
to be
be produced,
produced,
and
and customers
customers served.
served.
Illustrating the Master Budget
Schedule Title of Schedule
1 Sales Budget
2 Production Budget
3 Direct-Materials Budget
4 Direct-Labor Budget
5 Manufacturing Overhead Budget
6 Selling, General, and Administrative Expense Budget (SG&A)
7 Cash Receipts Budget
8 Cash Disbursements Budget
9 Cash Budget
10 Budgeted Schedule of Cost of Goods Manufactured and Sold
11 Budgeted Income Statement
12 Budgeted Balance Sheet
The Sales Budget
Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
Sales Budget of Collegiate Apparel
Collegiate
Collegiate Apparel
Apparel Company
Company is is preparing
preparing budgets
budgets for
for
the
the year
year ending
ending December
December 31, 31, 20x1.
20x1.
Budgeted
Budgeted sales
sales are:
are:
First
First quarter
quarter –– 15,000
15,000 units
units
Second
Second quarter
quarter –– 5,0005,000 units
units
Third
Third quarter
quarter –– 10,000
10,000 units
units
Fourth
Fourth quarter
quarter –– 20,000
20,000 units
units
The
The selling
selling price
price is
is $12
$12 per
per unit.
unit.
Sales Budget of Collegiate Apparel
Production Budget
Sales Production
Budget Budget
t ed
e
pl
om
C
Plan of resources needed to meet current
sales demand and ensure inventory levels
are sufficient for future sales.
Forecasting Production
Rearrange the basic inventory formula as follows . . .
Units in Required Sales Units in
beginning + production – in = ending
inventory in units Units inventory
Now, solve for required production . . .
Units Sales Units in Expected
to be = in + ending – beginning
Produced Units inventory inventory
The Production Budget
Collegiate Apparel wants units in ending finished
goods inventory to be 10% of the next quarter’s
expected sales in units.
At the beginning of the year, 1,500 completed
units were on hand.
During the first quarter of 20x2, 15,000 units are
expected to be sold.
Let
Let’’ss prepare
prepare the
the production
production budget.
budget.
The Production Budget
5,000
5,000 ×× 10%
10% == 500
500 units
units
Direct-Materials Budget
Direct materials needed for the budget period
can be determined as follows . . .
Required
Required Materials
Materials Ending
Ending Beginning
Beginning
materials
materials = used
used in
in + materials
materials – materials
materials
purchases
purchases production
production inventory
inventory inventory
inventory
Direct-Materials Budget
At
At Collegiate
Collegiate Apparel
Apparel 1.5
1.5 yards
yards of
of fabric
fabric are
are required
required
per
per unit
unit of
of product.
product.
Management
Management wants
wants fabric
fabric on
on hand
hand at at the
the end
end of
of each
each
quarter
quarter to
to be
be 10%
10% of of next
next quarter
quarter’’ss raw
raw materials
materials
required.
required. On
On January
January 11stst,, 2,100
2,100 yards
yards of of fabric
fabric are
are on-
on-
hand.
hand. During
During the
the first
first quarter
quarter of
of 20x2,
20x2, Collegiate
Collegiate
expects
expects 21,000
21,000 yards
yards of of fabric
fabric to
to be
be required.
required.
Each
Each yard
yard of
of fabric
fabric cost
cost the
the company
company $2.
$2.
Let
Let’’ss prepare
prepare the
the direct
direct materials
materials budget.
budget.
Direct-Materials Budget
8,250
8,250 ×× 10%
10% == 825
825 units
units
Direct-Labor Budget
At Collegiate Apparel, each unit produced
requires 0.20 hour (12 minutes) of direct
labor.
Workers earn a wage rate of $10 per hour
regardless of the hours worked. Collegiate
Apparel can hire workers as needed to
meet production.
Let’s prepare the direct labor budget.
Direct-Labor Budget
Manufacturing-Overhead Budget
Collegiate Apparel uses activity-based budgeting.
At the unit-level, each unit produced requires $0.25 of indirect
materials and $0.15 of electricity.
At the batch-level, the company expects the following
production runs:
1st quarter – 28
2nd quarter – 11
3rd quarter – 22
4th quarter – 39
At the product-level, the company expects two new style
designs each quarter with each new T-shirt design costing
$500.
Details of the facilities-level overhead costs are shown on the
manufacturing-overhead budget.
Manufacturing-Overhead Budget
Unit-, Batch-, and Product-level Portions of the Budget
Manufacturing-Overhead Budget
Product-, Facilities-level and Total Overhead Budget
$5,600
$5,600 ++ $8,400
$8,400 ++ $1,000
$1,000 ++ $36,500
$36,500 == $51,500
$51,500
SG&A Expense Budget
At Collegiate Apparel, sales commissions
and freight-out are unit-level SG&A.
Customer-level SG&A expenses include
licensing fees for use of names and logos.
Facilities-level SG&A expense include
sales salaries, advertising and clerical
wages.
Let’s prepare the SG&A expense budget.
SG&A Expense Budget
$ $ $ $
Cash Receipts Budget
At Collegiate Apparel all sales are made on
account.
The company collects 80% of its billings in the
quarter of the sale and 18% in the following
quarter. The remaining two percent of each
quarter’s sales are expected to be uncollectible.
Sales in the last quarter of 20x0 were $240,000.
Let’s prepare the Cash Receipts Budget.
Cash Receipts Budget
$240,000
$240,000 ×× 18%
18% == $43,200
$43,200 $180,000
$180,000 ×× 18%
18% == $32,400
$32,400
$180,000
$180,000 ×× 2%
2% == $3,600
$3,600
Cash Payments for Direct-Materials
At Collegiate Apparel all purchases of raw
materials are made on account.
The company pays for 60% of its purchases in
the quarter of the purchase and the remaining
40% in the following quarter.
Purchases in the last quarter of 20x0 were
$56,850.
Let’s prepare the Cash Disbursements Budget.
Cash Payments for Direct-Materials
$18,150
$18,150 ×× 60%
60% == $10,890
$10,890
$39,450
$39,450 ×× 40%
40% == $15,780
$15,780
Other Cash Disbursements
Cash Budget
Collegiate Apparel started the year with a cash
balance of $10,000, and borrows $100,000 at the
beginning of 20x1 to finance plant expansion.
The loan is repaid in the amount of $25,000 at the
end of each quarter with interest on the unpaid
balance at 10%.
Payments for the plant additions were:
1st quarter = $45,000
2nd quarter = $15,000
3rd quarter = $5,000
4th quarter = $35,000
Let’s prepare the Cash Budget.
Cash Budget
$100,000
$100,000 ×× 10%
10% ×× ¼
¼ == $2,500
$2,500
Calculation of Absorption Unit Cost
Cost of Goods Manufactured and Sold
Budget
At Collegiate Apparel the production cycle is
short enough that it has no work-in-process
inventory at any time.
From Schedule 3 in the text, we know there are
2,100 yards of fabric at $2.00 per yard in
beginning raw material inventory.
And from Schedule 2 we know there are 1,500
units in ending finished goods inventory. We just
computed the absorption cost per unit at $9.00.
Let’s prepare the Cost of Goods Manufactured
and Sold Budget.
Cost of Goods Manufactured and
Sold Budget
2,100
2,100
×× $2
$2
$4,200
$4,200
1,500
1,500
×× $9
$9
$13,500
$13,500
Budgeted Income Statement
Budgeted Balance Sheet
The balance in the building account on December 31,
20x0 was $400,000, and the balance in the equipment
account was $320,000. Total accumulated
depreciation was $240,000. Depreciation expense is
recorded at the rate of $60,000 per year.
At December 31, 20x1, the company had a long-term,
noninterest-bearing note payable of $200,000. The
note is due on December 31, 20x3.
The balance in the owners’ equity account at
December 31, 20x0, was $330,160.
Supplies on hand at December 31, 20x1 were $2,000.
Let’s prepare the Budgeted Balance Sheet.
$240,000
$240,000
×× 18%
18%
$43,200
$43,200
$56,850
$56,850
×× 40%
40%
$22,740
$22,740
$330,160
$330,160
56,750
56,750
$386,910
$386,910
Responsibility for Budget
Administration
Budget Committee – Consists of key senior
executives who may advise the budget director
during the preparation of the budget.
The authority to give final approval to the budget
usually rests with the board of directors.
Budgetary Slack: Padding the Budget
Padding
Padding the
the budget
budget means
means intentionally
intentionally
underestimating
underestimating revenues
revenues or
or overestimating
overestimating
costs.
costs.
The
The difference
difference between
between the the revenue
revenue or
or cost
cost
projection
projection that
that aa person
person provides
provides and
and aa
realistic
realistic estimate
estimate ofof the
the revenue
revenue or
or cost
cost is
is
called
called budgetary
budgetary slack
slack..
A
A solution:
solution: reward
reward managers
managers for
for making
making
accurate
accurate estimates.
estimates.
Participative Budgeting
Participative Budgeting – the use of input from
lower- and middle-management
employees.
The process is time consuming but enhances
employee motivation and acceptance of
goals.
Ethical Problems in Budgeting
Much of the information for the budget is
provided by persons whose performance is
then compared with the budget they help
develop.
Let’s prepare the
sales forecast with a I think sales
4% increase, so we will increase by
will really look good! 10% next year.
