Chapter 6: Master Budget and Responsibility Accounting
A budget is the quantitive expression of a proposed plan of action by management for a specified period Also to aid to coordinate what needs to be done to implement that plan A financial budget quantifies managers’ expectations regarding a company’s income, cash flows, and financial position Strategy specifies how an organization matches it capabilities with the opportunities in the marketplace to accomplish its objectives Stratigic plans are expressed through long-run budgets and operating plans are expressed via short-run budgets
The master budget expressed management’s operating and financial plans for a specified period, usually a fiscal year, and it includes a set of budgeted financial statements. Involves both operating and financing decisions: Operating decisions deal with how to best use the limited resources of an organization Financing decisions deal with how to obtain the funds to acquire those resources Budgeted statements are sometimes called pro forma statements
Promote coordination and communication among subunits within the company Coordinationg is meshing and balancing all aspects of production or service and all departments in a company in the best way to meet its goals Communication is making sure all employees understand those goals Provide a framework for judging performance and facilitating learning Budgets enable a company’s managers to measure against predicted performance Budgets overcome two limitations of using past performance as a basis for judging actual results 1) Past results often incorporate past miscues and substandard performance 2) Future conditions can be expected to differ from the past Motivate managers and other employees
Performance of employees improves when they receive a challenging budget
Challenges in Administering Budgets
The budgeting process is time-consuming (months-long exercise consuming a tremendous amount of resources)
Developing an Operating Budget
A rolling budget (continuous budget) is a budget that is always available for a specified future period (created by continuously adding a month, quarter, or year to the period that just ended) Various part of a master budget:
Operating Budget – Budgeted income statement and its supporting budget schedules Revenues budget is often the starting point of the operating budget Financial Budget – Part of the master budget that focuses on how operations planned capital outlays affect cash. It is made up of the capital expenditures budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows.
Step 1: Prepare the Revenues Budget
Begin with revenues budget because the forecasted level of unit sales or revenues has a major impact on the production capacity and the inventory levels planned Sometimes managers base the revenues budget on the maximum units that can produced because sales will be limited by that amount
Step 2: Prepare the Production Budget (in units)
Next step is to plan the production so that the product is available when customers need it The only new information managers need to prepare the production budget is the level of finished good inventory High inventory levels increase the cost of carrying inventory, the costs of quality, and shrinkage costs However keeping inventory levels too low increases set up costs and results in lost sales from holding inadequate inventory
Step 3: Prepare the Direct Material Usage Budget and Direct Material Purchases Budget The number of units produced, calculated in schedule 2, is the key to computing the usage of direct materials in quantities and dollars Managers set budgets that motivate production managers to reduce direct material costs and keep negligible WIP inventory Direct materials inventories are costed using the FIF method (first goods purchased are the first goods sold, selling off the oldest...
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