12 The Master Budget

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 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 Supporting Documents

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 Budget Financial Budget Sales budget Cash budget Purchases budget Budgeted income statement Cost of goods sold budget Budgeted balance sheet Operating expense budget Capital budget Continuous Budgets (Rolling Budgets) Add one month in the future as the current month is completed

Master Budget for A Nonmanufacturing Company Start Sales budget Ending inventory budget Purchases budget Operating Budget Cost of goods sold budget Operating expense budget Financial Budget Capital budgets Cash budget Budgeted Balance Sheet Budgeted Income Statement

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

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