1. Master Budget and Responsibility Accounting
CHAPTER 6
Master Budget
and
Responsibility Accounting

2. CHAPTER 6 LEARNING OBJECTIVES
Describe the master budget and explain its benefits
Describe the advantages of budgets
Prepare the operating budget and its supporting schedules
Use computer-based financial planning models for sensitivity analysis
Describe responsibility centers and responsibility accounting

3. Chapter 6 learning objectives, concluded
Recognize the human aspects of budgeting
Appreciate the special challenges of budgeting in multinational companies

4. Budget Defined
A budget is the quantitative expression of a proposed plan of action by management for a specified period.
A budget is an aid to coordinating what needs to be done to implement that plan.
A budget generally includes both the plan’s financial and nonfinancial aspects and serves as a blueprint for the company to follow in an upcoming period.

5. Budgets help managers….
Communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace.
Judge performance by measuring financial results against planned objectives, activities, and timelines to learn about potential problems.
Motivate employees to achieve their goals.

6. Strategic plans and operating plans
To develop successful strategies, managers must consider questions such as the following:
What are our objectives?
How do we create value for our customers while distinguishing ourselves from our competitors?
Are the markets for our products local, regional, national or global?
What trends affect our markets?
What organizational and financial structures serve us best?
What are risks and opportunities of alternative strategies and what are our contingency plans if our preferred plan fails?

7. Budgeting cycle:
Before the start of a fiscal year, managers at all levels take into account past performance, market feedback, anticipated future changes and other indicators to initiate plans for the next period.
Senior managers give subordinate managers a frame of reference against which they will compare actual results.
Managers and management accountants investigate any deviations from the plan.

8. Working document: Master Budget
The master budget is at the core of the budgeting process. It expresses management’s operating and financial plans for a specified period:
Operating decisions deal with how to best use the limited resources of an organization. (the operating budget)
Financial decisions deal with how to obtain the funds to acquire those resources. (the financial budget)

9. Advantages of Budgets
Promotes coordination and communication among subunits within the company.
Provides a framework for judging performance and facilitating learning.
Motivates managers and other employees.

10. Challenges in administering a budget
Top managers want lower-level managers to participate in the budgeting process because they have more specialized knowledge of day-to-day management, however…
The budgeting process is time-consuming, and
Upper-level management’s support is crucial

11. Time coverage of budgets
The timeline for a budget is dependent on the motive for creating the budget. The most frequently used budget period is 1 year. Businesses may also use a rolling budget. This budget is always available for a specified future period, by continually adding a month, quarter, or year to the period just ended.

12. To facilitate the budget process, use the 5-step decision making process
Identify the problem and uncertainties
Obtain information
Make predictions about the future
Make decisions by choosing among alternatives
Implement the decision, evaluate performance and learn

13. Basic Operating Budget Steps
Prepare the revenues budget (schedule 1; the starting point) Page 206
Prepare the production budget (schedule 2; in units). Page 207
Prepare the direct materials usage budget and direct materials purchases budget (schedule 3) Pages 207 and 208
Prepare the direct manufacturing labor budget (schedule 4) Page 208

14. Basic Operating Budget Steps
Prepare the manufacturing overhead costs budget (schedule 5) Page 210
Prepare the ending inventories budget (schedule 6A, units; schedule 6B, dollars) Pages 211 and 212
Prepare the cost of goods sold budget (schedule 7) Page 212
Prepare the operating expense (period cost) budget (schedule 8) Page 213
Prepare the budgeted income statement Exhibit 6-3 page 213

15. Basic Financial Budget Steps From Appendix
Based on the operating budgets:
Prepare the capital expenditures budget.
Prepare the cash budget.
Prepare the budgeted balance sheet.
Prepare the budgeted statement of cash flows.

16. Overview of the Master Budget

17. Financial-planning models & sensitivity analysis:
Financial planning models may be employed to conduct sensitivity (“what- if”) analysis to assist in the budgetary process.
A “what-if” analysis or sensitivity analysis is a technique that examines how a result will change if the original predicted data or underlying assumption change.

18. Sensitivity Analysis
Sensitivity analysis is used to assist managers in planning and budgeting.
Sensitivity analysis is a “what if” technique that illustrates the impact of changes from the predicted data.
Two scenarios are being considered for Stylistic Furniture’s (the company from the textbook) budget.

19. Budgeting and Responsibility Accounting
Responsibility center—a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities.
Responsibility accounting—a system that measures the plans, budgets, actions, and actual results of each responsibility center.
Generally, we consider 4 levels of responsibility center.

20. Types of Responsibility Centers
Cost—accountable for costs only
Revenue—accountable for revenues only
Profit—accountable for revenues and costs
Investment—accountable for investments, revenues, and costs

21. Budgets and Feedback
Budgets offer feedback in the form of variances: actual results deviate from budgeted targets.
Variances provide managers with:
Early warning of problems
A basis for performance evaluation
A basis for strategy evaluation

22. Responsibility & Controllability
Controllability is the degree of influence that a manager has over costs, revenues, or related items for which he or she is being held responsible.
Responsibility accounting helps managers to first focus on whom they should ask to obtain information and not on whom they should blame.
Responsibility accounting focuses on gaining information and knowledge, not only on control.
The fundamental purpose of responsibility accounting is to enable future improvement.

23. Human aspects of budgeting
Budgetary slack is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve.
Stretch targets are targets that are challenging but achievable to focus effort on achieving the targets.
Kaizen Budgeting is a practice whereby each budget process incorporates continuous improvement from past results.

24. Budgeting in multinational companies
International companies face significant exchange rate uncertainty rendering budgets for traditional purposes of evaluating a firm’s performance moot but still very useful as a tool to help manager’s adapt plans and coordinate actions when conditions are volatile.

25. Terms to learn TERMS TO LEARN PAGE NUMBER REFERENCE
Activity-based budgeting(ABB)
Page 209
Budgetary slack
Page 218
Cash budget
Page 225
Continuous budget
Page 202
Controllability
Page 217
Controllable cost
Cost center
Page 216
Financial budget
Page 203
Financial planning models
Page 213
Investment center

26. Terms to learn, concluded
PAGE NUMBER REFERENCE
Kaizen budgeting
Page 220
Master budget
Page 199
Operating budget
Page 203
Organization structure
Page 216
Pro forma statements
Profit center
Responsibility accounting
Responsibility center
Revenue center
Rolling budget
Page 202
Rolling forecast