1. Chapter 6 The Master Budget and Responsibility accounting
Dr.Mohamed Mousa

2. 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 the plan’s both financial and nonfinancial aspects and serves as a road map for the company to follow in an upcoming period.
A budget is the quantitative expression of a proposed plan of action by management for a specified period, and also works as an aid to coordinating what needs to be done to implement that plan.
Dr . Mohamed Mousa

3. 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.
Budgets serve many purposes for firms including those seen here:
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.
Dr . Mohamed Mousa

4. Strategic Plans and Operating Plans :
Budgeting is most useful when it is integrated with a company’s strategy. Strategy specifies how an organization matches its capabilities with the opportunities in the marketplace to accomplish its objectives.
A company can have a strategy of providing quality products or services at a low price, or a strategy of providing a unique product or service that is priced higher than the products or services of competitors.
Dr . Mohamed Mousa

5. 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?
As managers work to develop successful strategies, they must consider various questions including the risks and opportunities of alternative strategies, contingency plans if the preferred plan fails, how the economy, industry and competitors affect the business as well as, and in addition to, the questions shown here:
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?
How do the economy, our industry, and our competitors affect us?
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?
Dr . Mohamed Mousa

6. Strategic Plans and Operating Plans :
What trends affect our markets?
How do the economy, our industry, and our competitors affect us?
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?
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

7. Budgeting Cycle:
Before the start of a fiscal year, managers at all levels take into account past performance, market feedback, and anticipated future changes to initiate plans for the next period.
Senior managers give subordinate managers a frame of reference, a set of specific financial or nonfinancial expectations, against which they will compare actual results.
Managers and management accountants investigate any deviations from the plan.
These three steps describe the ongoing budget-related processes. The working document at the core of this process is called the master budget. In the next slide, we’ll take a closer look at the master budget.
Dr . Mohamed Mousa

8. Advantages of Budgets :
Budgets are an integral part of management control systems. As we have discussed at the start of this chapter, when administered thoughtfully by managers, budgets do the following:
Promote coordination and communication among subunits within the company.
Provide a framework for judging performance and facilitating learning.
Motivate managers and other employees.
When administered thoughtfully by managers, budgets do the following:
Promote coordination and communication among subunits within the company
Provide a framework for judging performance and facilitating learning
Motivate managers and other employees
Dr . Mohamed Mousa

9. Challenges in Administering a Budget :
The budgeting process is time-consuming. Estimates suggest that senior managers spend about 10–20% of their time on budgeting and financial planning departments spend as much as 50% of their time on it. For most organizations, the annual budget process is a months-long exercise that consumes a tremendous amount of resources.
There are several challenges in administering a budget. Among them is the time commitment a thoughtfully administered budget requires.
Dr . Mohamed Mousa

10. 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 obtain those resources (the financial budget).
The master budget is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions managers make as they prepare the budget.
Dr . Mohamed Mousa

11. Operating Budget and Financial Budget :
The operating budget begins with the Revenues budget, includes multiple schedules and concludes with the Budgeted Income Statement.
The financial budget is made up of the Capital Expenditure budget, the Cash budget, the Budgeted Balance Sheet, and the Budgeted Statement of Cash Flows.
The operating budget begins with the Revenues budget, includes multiple schedules and concludes with the Budgeted Income Statement.
The financial budget is made up of the Capital Expenditure budget, the Cash budget, the Budgeted Balance Sheet, and the Budgeted Statement of Cash Flows.
Dr . Mohamed Mousa

12. Basic Operating Budget Steps :
Prepare the revenues budget .
Prepare the production budget .
Prepare the direct materials usage budget and direct materials purchases budget .
Prepare the direct manufacturing labor costs budget .
Prepare the manufacturing overhead costs budget
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

13. Basic Financial Budget :
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.
Once the schedules just discussed and the budgeted income statement are complete, additional schedules need to be created to complete the budgeted balance sheet and the financial section of the master budget.
Prepare the capital expenditures budget.
Prepare the cash budget.
Prepare the budgeted balance sheet.
Prepare the budgeted statement of cash flows.
Dr . Mohamed Mousa

14. Sales budget company for the period
the revenues budget :
Sales budget company for the period
from ... until
The following table shows the sales budget model in detail in terms of determining the quantity of goods available for sale:
March
February
January
Description x
Sales quantity
X Unit selling price xx
Sales value
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

15. Sales budget company for the period from ... until ......
The Revenues budget :
Sales budget company for the period from ... until
Total
March
February
January
Description xx x
Production quantity
+ Production stock first period
- Production stock for the last period
Quantity available for sale
X Unit selling price
Sales value
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

16. Example no 1:
Al Sadat Modern produces two models of remote control, X and y, and the unit sells for 24 $ and 40 $ respectively. The following are the forecasts of sales in units during the second and third quarters of 2018:
Number of units sold: following data:
Required: Prepare the sales budget for the second and third quarters of 2018. Q3 Q2
Product
13000
15000 x
7000
6000 y
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

17. Solution the Sales balance for the second and third quarter of 2018:
Value
X Price
Quantity
Description
Product x :
360000 24
15000 Q2
312000
13000 Q3
672000 --
Total sales of x
Product Y :
240000 40
6000
280000
7000
520000
Total sales of y
Total sales of company
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

18. the production budget :
The production program budget is based on sales budget estimates.
Estimated quantity of production = sales quantity + total production stock last period - total production stock for the first period.
March
February
January
Description x
Sales quantity
+ total production stock last period
(X)
- total production stock for the first period. xx
Estimated quantity of production
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

19. The Direct materials purchases budget :
The purchases budget is concerned with determining the value of purchases incurred by the establishment in order to obtain raw materials.
Quantity of materials to be purchased = Quantity of raw material requirements + Quantity of raw material stock last period - Quantity of stocks of raw materials for the first time.
Value of purchases = Quantity of items to be purchased × Average purchase price of the unit.
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

20. The Direct materials purchases budget :
Planning budget for the company's procurement For the period from ... until
Total
March
February
January
Description xx x
Quantity of material requirements
+ Last stock period
x))
- First period stock
= Quantity of purchases
X Average purchase price
  Cost of purchases
The revenue budget is usually based on expected demand because demand for a company’s products is invariably the limiting factor for achieving profit goals.
The logical next step is to plan the production so that the product is available when customers need it.
The number of units to be produced is the key to computing the usage of direct materials in both quantity and dollars. This will be based on quantity required for each unit to be produced from the production budget.
To create the budget for direct manufacturing labor costs, managers estimate wage rates, production methods, process and efficiency improvements and hiring plans.
Dr . Mohamed Mousa

21. Example no 2:
Gana company produces one of its products using two types of raw materials (X), (Y). The 2017 sales plan was distributed over three-year periods as follows:
First trimester ,000 units.
Second trimester ,000 units.
Third trimester ,000 units.
If you know that: * The budget plan for 2016 states that the remaining stock of the period is 16,000 units.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

22. Example no 2:
* The production plan for 2017 is drawn up so that the stock at the end of every third year is equivalent to 15% of the sales.
The operation of the product unit requires the use of 3 kg of raw material (x) at the price of 5 $ per kilogram, and requires the use of 4 kg of raw material (y) at 10 $ per kilogram.
Required: 1 - Preparation of production budget for every third year and for the year in total? 2 - Preparation of the balance of production needs of raw materials for every third year and for the year in total?
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

23. Solution
First: the budget of production for every third year and for the year in total:
Total
Third trimester
Second trimester
First trimester
Description
120000
40000
30000
50000
Sales quantity
6000
4500
7500
+ total production stock last period(15 % x S. Q)
(16000)
(4500)
(7500)
- total production stock for the first period.
110000
41500
27000
Estimated quantity of production
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

24. Solution
Second: To balance the production needs of raw materials for every third year and for the year in total:
Total
Third trimester
Second trimester
First trimester
Description
110000
41500
27000
Quantity of material requirements
Raw material needs:
330000
124500
81000
Raw material X:
=(quantity of production x 3 kg)
622500
405000
Raw material cost = (quantity of raw materials x 5 $)
440000
166000
108000
Raw material Y:
=(quantity of production x 4 kg)
Raw material cost = (quantity of raw materials x 10 $)
  Cost of purchases
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

25. Responsibility accounting “
The Next Lecture
Sequences Chapter 6
“ The Master Budget and
Responsibility accounting “
Dr . Mohamed Mousa