Traditions and Innovations Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney Chapter 13 The Master Budget

Learning Objectives (1 of 2) Explain why budgeting is important Describe how strategic and tactical planning are related to budgeting Identify the starting point of a master budget Prepare various master budget schedules

Learning Objectives (2 of 2) Explain how the master budget schedules relate to one another Clarify why the cash budget is important in the master budgeting process (Appendix) Explain how a budget manual facilitates the budgeting process

Planning is the cornerstone of effective management

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

Budgets Communicate objectives, constraints, and expectations Provide financial predictions Identify potential problems Determine resource allocation and constraints Permit control through budget-to-actual comparisons

The Planning Process Strategic Planning Tactical Planning Budget

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

External Key Variables Competitor actions U.S. market conditions U.S. political/regulatory climate Emerging technology issues Consumer trends and attitudes International market conditions Demographics International political/regulatory climate

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

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

The Control Phase Actual-to-budget comparisons Determining and investigating variances Corrective action Feedback to operating managers Budget

The Balanced Scorecard Financial performance Customer satisfaction Innovation and learning Key performance indicators Measures Short-term performance Indicators of future success

The Master Budget Operating Budget Financial Budget Cash Budget Sales Budget Cash Budget Production Budget Capital Expenditures Budget Purchases Budget Balance Sheet Direct Labor Budget Income Statement Overhead Budget Statement of Cash Flows Selling & Administrative Budget Statement of Retained Earnings

The Operating Budget Sales Budget

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

The Operating Budget Sales Budget Production Budget

The Operating Budget Sales Budget Production Budget Purchases Budget Overhead Budget Direct Labor Budget

Selling Expense Budget The Operating Budget Sales Budget Selling Expense Budget Admin Expense Budget Production Budget Purchases Budget Overhead Budget Direct Labor Budget

The Financial Budget Operating Budget

The Financial Budget Cash Budget Capital Budget Operating Budget

The Financial Budget Cash Budget Capital Budget Income Statement Operating Budget

Statement of Retained Earnings The Financial Budget Cash Budget Capital Budget Income Statement Operating Budget Statement of Retained Earnings

Statement of Retained Earnings The Financial Budget Cash Budget Capital Budget Income Statement Operating Budget Statement of Retained Earnings Balance Sheet

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

Budgets Provide Guide to align activities and resources with organizational goals Vehicle to promote employee participation, cooperation, and departmental coordination Tool to enhance planning, controlling, problem solving, and evaluating Budget

Budgeting Provides Basis to sharpen responsiveness to internal and external factors Model to view future performance and consider alternative measures Budget

Budgeting Terms Continuous budgeting 12-month rolling budget

Budgeting Terms Continuous budgeting Budget slack intentional underestimation of revenue intentional overestimation of expenses overcome by linking actual performance to budget through a bonus system

Budgeting Terms Continuous budgeting Budget slack Participatory budget developed by top management and operating personnel

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

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

Budget Manual Statements of budgetary purpose and its desired results Listing of specific budgetary activities to be performed Calendar of scheduled budgetary activities Sample of budgetary forms Original, revised, and approved budgets

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?