1. © 2007 Pearson Education Canada Slide 11-1 The Master Budget 11

2. © 2007 Pearson Education Canada Slide 11-2 Budgeting: The Overall Plan Every organization has a goal (or a set of goals) Management develops plans to achieve these goals What type of product to produce What level of cost and quality What level of price What degree of advertising Inventory and credit policies Master Budget Supporting Documents Budget Formal quantitative expression of management's plans What things are expected to look like for the upcoming period Allows for systematic rather than chaotic reaction to change

3. © 2007 Pearson Education Canada Slide 11-3 Types of Budgets Strategic Plan Sets overall goals and objectives for the organization Capital Budget Long range plan for investing in and financing long term assets such as buildings and equipment Master Budget Yearly projection of revenues, costs and volumes including operating schedules and financial statements Operating BudgetFinancial Budget Sales budgetCash budget Purchases budgetBudgeted income statement Cost of goods sold budgetBudgeted balance sheet Operating expense budgetCapital budget Continuous Budgets (Rolling Budgets) Add one month in the future as the current month is completed

4. © 2007 Pearson Education Canada Slide 11-4 Master Budget for A Nonmanufacturing Company Sales budget Purchases budget Cost of goods sold budget Operating expense budget Budgeted Income Statement Budgeted Balance Sheet Cash budget Ending inventory budget Capital budgets Start Operating Budget Financial Budget

5. © 2007 Pearson Education Canada Slide 11-5 Advantages of Budgets Planning Compels managers to think ahead Budgeting makes planning an explicit management responsibility Framework for Judging Performance Provides definite expectations that are the best framework for judging subsequent performance Benchmark to evaluate current results against Communication and Coordination Budgets inform managers of which is expected of them "Top down" - Management clarifies goals & objectives "Bottom up" - Managers' plans for achieving objectives Aids managers in coordinating their efforts, so that the objectives of the organization as a whole match the objectives of its parts

6. © 2007 Pearson Education Canada Slide 11-6 Sales Forecastingand Budgeting Sales forecast: prediction of sales under a given set of conditions Sales budget: result of choosing one of the sales forecasts and implementing it Important considerations: 1. past patterns of sales 2. estimates made by the sales force 3. general economic conditions 4. competitors’ actions 5. changes in the firm’s prices

7. © 2007 Pearson Education Canada Slide 11-7 Making A Budget Work: Anticipating Human Behaviour Successful budgeting process requires support from all employees Lower-level workers and managers' attitudes towards the budget will be heavily influenced by the attitude of top management Use caution when using budget to evaluate subordinates Nobody likes someone to check on their performance Avoid concentrating on managers' failings Accountant must show how the budget can help everyone achieve better results Need coordination between what goals are stressed in the budget and what dimensions managers are rewarded on Everyone must understand and accept the budget as a tool Budgets which allow managers and employees to participate in the establishment of targets are usually more effective than budgets which are imposed