1. Master Budgeting Chapter 8
ACTG 202 – Principles of Managerial Accounting
“Good plans shape good decisions. That’s why good planning helps make elusive dreams come true.”
-Geoffrey Fische
6 icqs

2. Learning Objective 1
Understand why organizations budget and the processes they use to create budgets.

3. The Basic Framework of Budgeting
A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.
The act of preparing a budget is called budgeting.
The use of budgets to control an organization’s activities is known as budgetary control.

4. Difference Between Planning and Control
Planning – involves developing objectives and preparing various budgets to achieve those objectives.
Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.

5. Responsibility Accounting
Managers should be held responsible for those items - and only those items - that they can actually control to a significant extent. Responsibility accounting enables organizations to react quickly to deviations from their plans and to learn from feedback.
Hotel example

6. Choosing the Budget Period
Operating Budget
2014
2015
2016
2017
Operating budgets ordinarily
cover a one-year period
corresponding to a company’s fiscal year. Many companies divide their annual budget
into four quarters.
A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.

7. Self-Imposed Budget
A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.

8. Advantages of Self-Imposed Budgets
Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.
Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.
A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.

9. Self-Imposed Budgets
Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack.”
Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets.

10. Human Factors in Budgeting
The success of a budget program depends on three important factors:
Top management must be enthusiastic and committed to the budget process.
Top management must not use the budget to pressure employees or blame them when something goes wrong.
Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.

11. The Master Budget: An Overview
Sales budget
Selling and
administrative
budget
Ending inventory
budget
Production budget
Direct materials
budget
Direct labor budget
Manufacturing
overhead budget
The Budget must be prepared in a specific order
Cash Budget
Budgeted income statement
Budgeted balance sheet

12. Learning Objective 2
Prepare a sales budget, including a schedule of expected cash collections.

13. 9-13
The Sales Budget
The sales budget is the starting point in preparing a master budget
All other steps in the budgeting process depend on the sales budget
Most big budgeting problems result from a poor sales budget
Spend time on this!! Do actual calculations.
Who should be involved in creating the sales budget?
What if sales are overbudgeted? How does this impact expenses?

14. 9-14
The Sales Budget
A sales budget is constructed by multiplying budgeted unit sales by the selling price
Revenue and cash receipts may happen in different time periods
Both are important
E8-1 (page 372)
Sales numbers should not be pulled out of thin air
Burger King
Law Firm
Engineering Firm
Retail candy store
Talk about revenue and cash receipts timing differences – Ski manufacturing

15. Prepare a production budget.
Learning Objective 3
Prepare a production budget.

16. Budget and Expected Cash Collections
The Production Budget
Sales
Budget and Expected Cash Collections
Production
Budget
Completed
The production budget must be adequate to
meet budgeted sales and to provide for
the desired ending inventory.

17. Calculating Production Needs
9-17
Calculating Production Needs
Budgeted unit sales
+ Ending inventory requirements
= Total needs
- Beginning inventory
= Required production
NEEDS compared to SOURCES
E 8-2 (page 373)
Not dollars – focus is on quantities

18. 9-18
Production Budget Determines Need for Manufacturing Materials, Labor & Overhead
Once the production needs are determined this can be converted into dollar amounts that need to be spent
The next step is calculating:
Direct materials budget
Direct labor budget
Manufacturing overhead budget

19. Learning Objectives 4, 5, and 6
Prepare a direct materials budget, labor budget, and manufacturing overhead budget

20. The Direct Materials Budget
9-20
The Direct Materials Budget
Raw materials needed for production
+ Desired ending inventory of raw materials
= Total raw material needs
- Beginning inventory of raw materials
= Raw materials to be purchased
NEEDS compared to SOURCES (in dollars)
E8-3 (page 373)

21. The Direct Labor Budget
9-21
The Direct Labor Budget
To create a direct labor budget we need
Required production (from Production Budget)
Number of labor hours required per unit
The direct labor rate per hour
Note: if production labor amounts are fixed than there may be a minimum total labor cost
E8-4 (page 373)
Usually there is not much timing difference between labor expense and cash payment of wages

22. Manufacturing Overhead Budget
9-22
Manufacturing Overhead Budget
A manufacturing overhead budget should be divided into:
Variable costs, and
Fixed costs
Which costs are fixed and which are variable should be reviewed and adjusted during the budgeting process
All manufacturing costs other than direct materials and direct labor

23. Manufacturing Overhead Budget
9-23
Manufacturing Overhead Budget
The manufacturing overhead budget is used to calculate the predetermined overhead rate
As illustrated in Chapter 3, the predetermined overhead rate is used to allocate overhead to products
Often, some of the fixed overhead costs, such as depreciation, are noncash items
E8-5 (page 374)
Need to calculate cost AND cash
Discuss the fact that depreciation is a noncash item
POHR = estimated total manufacturing overhead costs / estimated tot units of allocation base

24. Prepare a selling and administrative expense budget.
Learning Objective 7
Prepare a selling and administrative expense budget.

25. Selling and Administrative Expense Budget
9-25
Selling and Administrative Expense Budget
The selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing
In large organizations, this budget would be a compilation of many smaller, individual budgets submitted by different departments
To complete the selling and administrative expense budget, costs should be divided into variable and fixed costs
There may be noncash selling and administrative expenses such as depreciation
E 8-6 (page 374)

26. Learning Objective 8
Prepare a cash budget.

27. Format of the Cash Budget
The cash budget is divided into four sections:
Cash receipts section lists all cash inflows excluding cash received from financing;
Cash disbursements section consists of all cash payments excluding repayments of principal and interest;
Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and
Financing section details the borrowings and repayments projected to take place during the budget period.

28. Determining the Cash Excess or Deficiency
9-28
Determining the Cash Excess or Deficiency
Cash balance, beginning
+ Cash receipts
= Total cash available
- Cash disbursements
= Excess (def.) of cash available for disbursements
+/- Financing
= Cash balance, ending
E8-7 (page 374)
If there is a cash deficiency it means the company needs to find financing from outside
Debt or equity
Discuss line of credit financing

29. The Budgeted Income Statement
Cash
Budget
Budgeted
Income
Statement
Completed
With interest expense from the cash budget, Royal can prepare the budgeted income statement.

30. Prepare a budgeted income statement.
Learning Objective 9
Prepare a budgeted income statement.
E8-8 (page 375)
P8-17 (page 379)

31. The Budgeted Income Statement
Sales Budget.
Ending Finished Goods Inventory.
Selling and Administrative Expense Budget.
Cash Budget.

32. Steps in Budgeting Process - Summary
Sales Budget
Production Budget
Direct materials, direct labor and manufacturing overhead budget
Selling and administrative expenses budget
Cash budget
Budgeted income statement
Budgeted balance sheet
Perform Sensitivity Analysis