MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1The budgeting cycle includes the following elements:
a.Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. b.Providing a frame of reference, a set of specific expectations against which actual results can be compared. c.Investigating variations from plans. If necessary, corrective action follows investigation. d.Planning again, in light of feedback and changed conditions.
6-2The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period.
6-3Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans.
6-4We agree that budgeted performance is a better criterion than past performance for judging managers, because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets.
6-5Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: • Communication. Marketing could share information about seasonal demand with production. • Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer.
6-6In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test.
6-7A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2007 is superseded by a four-quarter rolling budget for April 2007 to March 2008, and so on.
8. The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget
2. Prepare the production budget (in units)
3. Prepare the direct material usage budget and direct material purchases budget 4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement
6-9The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.
6-10Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with changes in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate.
11. Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers.
12. Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based...