1. Foundations and Evolutions
Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 8
The Master Budget
COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

2. Learning Objectives (1 of 2)
Describe how strategic planning is related to budgeting
Identify the starting point of a master budget and explain why it is the starting point
Identify and prepare the various master budget schedules
Explain why the cash budget is important in the master budgeting process

3. Learning Objectives (2 of 2)
Prepare and understand budgeted financial statements prepared at the end of the budgeting process
List the benefits provided by a budget
(Appendix) Explain how a budget manual facilitates the budgeting process

4. 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

5. 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

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

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

8. The Master Budget
A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements
For a specific period of time
Static – based on a single level of output demand
Interactive – departments generate and consume information

9. The Master Budget Operating Budgets Financial Budgets 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

10. Selling and Admin Budget
The Operating Budget
Sales Budget
Selling and Admin Budget
Production Budget
Purchases Budget
Overhead Budget
Direct Labor Budget

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

12. Production Budget Production manager combines Sales estimates
Beginning inventory targets
Ending inventory targets
Determines the types, quantities, and timing of products to be manufactured

13. Direct Labor Budget Total number of people Specific types of workers
Production hours needed
Costs
Union contracts
Minimum wage laws
Fringe benefit costs
Payroll taxes

14. Overhead Budget Identify activity base Estimate overhead costs
Separate costs as fixed or variable
Show total costs for operating budgets
Show costs without depreciation for cash budgets

15. Cash Budget
Highlights importance of cash for organization’s continued existence
Translates accrual-based information into cash flows
Indicates effectiveness of credit practices
Allows for planned cash borrowing or investing
Used to prepare pro forma Cash Flow Statement

16. Capital Budget Long-term fixed asset needs Plant Equipment
Payment points

17. The Financial Budget Statement of Cash Flows Cash Budget
Capital Budget
Income Statement/COGMfg
Operating Budget
Statement of Retained Earnings
Balance Sheet

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

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

20. 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?

21. Potential Ethical Issues
Using a single budget system globally that may conflict with national cultures
Permitting budget slack
Distorting budgeting process by treating short-term conditions as long-term conditions
Using fraudulent accounting techniques to meet budget goals

22. Potential Ethical Issues
Ignoring employee input in budgeting
Justifying management decisions by using “backwards budgeting”
Disregarding contingencies in budgeting
Ignoring external performance measures and benchmarks

23. Potential Ethical Issues
Failure to communicate “big picture” assumptions to all managers participating in the budget process
Promoting “spend-it-or-lose-it” attitudes to punish cost savings and reward spending
Mandating “across-the-board” budget cuts without considering alternative cost reductions