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Chapter 8 The Master Budget Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage.

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Presentation on theme: "Chapter 8 The Master Budget Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage."— Presentation transcript:

1 Chapter 8 The Master Budget Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

2 Learning Objectives (1 of 2) Describe how strategic planning is related to budgeting Identify the starting point of a master budget and explain why it is the starting point Identify and prepare the various master budget schedules Explain why the cash budget is important in the master budgeting process

3 Learning Objectives (2 of 2) Prepare and understand budgeted financial statements prepared at the end of the budgeting process List the benefits provided by a budget (Appendix) Explain how a budget manual facilitates the budgeting process

4 Terms Budgeting - Formalizes plans and translates qualitative narratives into a documented, quantitative format Budget - Expresses a commitment to planned activities and resource acquisition and use

5 Strategic Planning Long-term (5 to 10 years) Top-level management Long-range goals, strategies, and policies Foundation for short-term planning Identify and gather information on key variables, both internal and external Strategic Planning

6 Tactical Plans Short-term (1 to 18 months) Top and middle management Specific objectives and means to achieve strategic plans Basis against which results can be measured Tactical Planning

7 Budgeting Short-term Top, middle, and operational management involvement Usable guidelines to implement strategic and tactical plans Allocates resources Standard against which performance can be measured Budget

8 The Master Budget A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements For a specific period of time Static – based on a single level of output demand Interactive – departments generate and consume information

9 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

10 The Operating Budget Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget Selling and Admin Budget

11 Sales Forecast Ask sales personnel Extrapolate past trends Use market research Employ statistical models and simulation Sales Forecast

12 Production Budget Production manager combines –Sales estimates –Beginning inventory targets –Ending inventory targets Determines the types, quantities, and timing of products to be manufactured

13 Direct Labor Budget Total number of people Specific types of workers Production hours needed Costs –Union contracts –Minimum wage laws –Fringe benefit costs –Payroll taxes

14 Overhead Budget Identify activity base Estimate overhead costs Separate costs as fixed or variable Show total costs for operating budgets Show costs without depreciation for cash budgets

15 Cash Budget Highlights importance of cash for organization’s continued existence Translates accrual-based information into cash flows Indicates effectiveness of credit practices Allows for planned cash borrowing or investing Used to prepare pro forma Cash Flow Statement

16 Capital Budget Long-term fixed asset needs –Plant –Equipment Payment points

17 The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/ COGMfg Statement of Retained Earnings Balance Sheet Statement of Cash Flows

18 Budgeting Terms Continuous budgeting Budget slack Participatory budget Imposed budgets –developed by top management –imposed on operating personnel

19 Activity Budget Connect line items in budget to list of activities Raise awareness of non-value-added activities Question and reduce non-value-added costs Budget

20 Questions How are strategic and tactical planning related to budgeting? In what order are the master budget schedules prepared? Why is the cash budget important in the master budgeting process?

21 Potential Ethical Issues Using a single budget system globally that may conflict with national cultures Permitting budget slack Distorting budgeting process by treating short-term conditions as long-term conditions Using fraudulent accounting techniques to meet budget goals

22 Potential Ethical Issues Ignoring employee input in budgeting Justifying management decisions by using “backwards budgeting” Disregarding contingencies in budgeting Ignoring external performance measures and benchmarks

23 Potential Ethical Issues Failure to communicate “big picture” assumptions to all managers participating in the budget process Promoting “spend-it-or-lose-it” attitudes to punish cost savings and reward spending Mandating “across-the-board” budget cuts without considering alternative cost reductions


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