1. Chapter 7
The Master Budget

2. Objective 1
Explain the major features
and advantages of a
master budget.

3. Advantages of Budgets
Goals and
Objectives
Budgets

4. Advantages of Budgets Compels managers to think ahead
Aids managers in coordinating
their efforts
Provides definite expectations that are the
best framework to evaluate performance

5. Types of Budgets Strategic Plan Long-Range Plan Capital Budget
Master Budget
Continuous Budget

6. Strategic Plan
The most forward-looking budget is the strategic plan, which sets the overall goals and objectives of the organization.

7. Long-Range Plan
The strategic plan leads to long-range planning, which produces forecasted financial statements for five- to ten-year periods.

8. Capital Budget Long-range plans… are coordinated with capital budgets,
which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.

9. Master Budget… Sales summarizes the Production planned activities
of all subunits of
an organization.
Production
Distribution
Finance

10. Master Budget
Operating Budget
Financial Budget

11. Objective 2
Follow the principal steps in
preparing a master budget.

12. Master Budget
Sales Budget
Master Budget
Purchases
Schedules
Costs

13. Components of Master Budget
Inventory
Budget
____ ____
Sales
Budget
____ ____
Purchases
Budget
____ ____
Cost of
Goods Sold
Budget
____ ____
Operating
Expenses
Budget
____ ____
Budgeted
Income
Statement
____ ____
Operating Budget

14. Components of Master Budget
Cash
Budget
_____ _____
Capital
Budget
_____ _____
Financial
Budget
Budgeted
Balance
Sheet
_____ _____

15. Objective 3
Prepare the operating budget
and the supporting schedules.

16. Operating Budget Cash collections Sales Budget from customers
Disbursements for purchases
Purchases Budget
Disbursements for operating expenses
Operating Expenses Budget

17. Cash Collections
It is easiest to prepare budgeted cash collections at the same time as the sales budget.
Cash collections include the current month’s cash sales plus the previous month’s credit sales.

18. Purchases Budget Budgeted purchases = Desired ending inventory
+ Cost of goods sold – Beginning inventory

19. Disbursements for Purchases
For example, 50% of the current month’s purchases and 50% of the previous month’s purchases may be included.
The total disbursements are then used in preparing the cash budget.

20. Operating Expense Budget
The budgeting of operating expenses depends on several factors.
Month-to-month changes in sales volume and other cost-driver activities directly influence many operating expenses.

21. Operating Expense Budget
Expenses driven by sales volume include sales commissions and many delivery expenses.

22. Operating Expense Budget
Other expenses are not influenced by sales or other cost-driver activity and are regarded as fixed, within appropriate relevant ranges.
Rent
Depreciation
Insurance
Salaries

23. Operating Expense Disbursements
Disbursements for operating expenses are based on the operating expense budget.

24. Operating Expense Disbursements
For example, 50% of last month’s and this month’s wages and commissions plus miscellaneous and rent expenses may be included.
The total of these disbursements is then used in preparing the cash budget.

25. Budgeted Income Statement
The income statement will be complete
after addition of the interest expense,
which is computed after the cash budget
has been prepared.

26. Budgeted Income Statement
Budgeted income from operations
is often a benchmark for judging
management performance.

27. Objective 4
Prepare the financial budget.

28. Cash Budget The cash budget has the following major sections:
total cash available before financing
cash disbursements
minimum cash balance desired
financing requirements
ending cash balance

29. Cash Budget Total cash available before financing =
Beginning cash balance + Cash receipts
Cash receipts depend on collections from
customers’ accounts receivable and cash sales
and on other operating income sources.

30. Cash Budget Cash disbursements for purchases depend on
the credit terms extended by suppliers and the
bill-paying habits of the buyer.
Payroll depends on wages, salaries,
commission terms, and payroll dates.

31. Cash Budget Disbursements for some costs and expenses
depend on contractual terms for installment
payments, mortgage payments, rents, leases,
and miscellaneous items.
Other disbursements include outlays for
fixed assets, long-term investments,
dividends, and the like.

32. Cash Budget Management determines the minimum
cash balance desired depending on the
nature of the business and credit arrangements.

33. Cash Budget Financing requirements depend on how
the total cash available compares with
the total cash needed.
Needs include the disbursements plus
the desired ending cash balance.

34. Cash Budget Ending cash balance
= Total cash available before financing
– Total disbursements + Cash from financing
The cash from financing can be either
positive (borrowing) or negative (repayment).

35. Budgeted Balance Sheet
The final step in preparing the master budget
is to construct the budgeted balance sheet
that projects each balance sheet item in
accordance with the business plan as
expressed in the previous schedules.

36. Objective 5
Understand the difficulties
of sales forecasting.

37. Sales Forecast
A sales forecast is a prediction of sales under a given set of conditions.

38. Factors to Consider When Forecasting Sales
Past patterns of sales
Estimates made by the sales force
General economic conditions
Competitors’ actions

39. Factors to Consider When Forecasting Sales
Changes in the firm’s prices
Changes in product mix
Market research studies
Advertising and sales promotion plans

40. Objective 6
Anticipate possible human
relations problems caused
by budgets.

41. Acceptance of the Budget
To fully benefit from budgets, an organization needs the support of all the firm’s employees.
To avoid negative attitudes toward budgets, accountants and top management must demonstrate how budgets can help each manager and employee achieve better results.

42. Acceptance of the Budget
Another problem that can negate the benefits
of budgeting arises if budgets stress one set
of performance goals, but employees and
managers are rewarded for different
performance measures.

43. Participative Budgeting
Budgets created with the active participation of all affected employees are generally more effective than budgets imposed on subordinates.
This involvement is usually called participative budgeting.

44. Objective 7
Use a spreadsheet to develop
a budget.

45. Software Spreadsheet software for personal computers
is a powerful and flexible tool for budgeting.
Sensitivity analysis is the systematic varying
of budget data input to determine the effects
of each change on the budget.

46. Objective 8
Understand the importance
of budgeting to managers.

47. Importance of Budgets to Managers
The budgetary process compels managers to
think and to prepare for changing conditions.

48. Importance of Budgets to Managers
Budgets are aids in planning, communicating, setting
standards of performance, motivating personnel
toward goals, measuring results, and directing
attention to problem areas that need investigation.

49. End of Chapter 7