1. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 8: The Master Budget Raiborn ● Kinney Cost Accounting Principles, 9e

2. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives How are strategic planning and tactical planning related to budgeting? What is the starting point of a master budget, and why? What are the various components of a master budget and how are they prepared? Why is the cash budget so important in the master budgeting process? How and why are budgeted financial statements prepared at the end of the budgeting process? What benefits are provided by a budget? (Appendix) How does a budget manual facilitate the budgeting process?

3. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Terms Budgeting — Formalizes plans and translates qualitative narratives into a documented, quantitative format Budget — Expresses a commitment to planned activities, resource acquisition, and resource use

4. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 Strategic Planning

5. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Tactical Planning 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 Tactical Planning

6. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 Budget

7. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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

8. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Master Budget Operating Budgets Financial Budgets Sales Budget Production Budget Purchases Budget Direct Labor Budget Overhead Budget Selling & Administrative Budget Cash Budget Capital Expenditures Budget Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Budget

9. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Operating Budget Sales Budget Production Budget Overhead Budget Direct Labor Budget Purchases Budget Selling and Administration Budget

10. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Sales Forecast Ask sales personnel Extrapolate past trends Use market research Employ statistical models and simulation Sales Forecast

11. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Production Budget Production manager combines  Sales estimates  Beginning inventory targets  Ending inventory targets Determines the types, quantities, and timing of products to be manufactured

12. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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

13. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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

14. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Capital Budget Long-term fixed asset needs  Plant  Equipment Payment points

15. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cash Budget Highlights the importance of cash for an 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. The Financial Budget Operating Budget Cash Budget Capital Budget Income Statement/ Cost of Goods Manufactured Statement of Retained Earnings Balance Sheet Statement of Cash Flows

17. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Budgeting Terms Continuous budgeting Budget slack Participatory budget Imposed budgets  developed by top management  imposed on operating personnel

18. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Questions How are strategic and tactical planning related to budgeting? What are the various components of a master budget, and how are they prepared? Why is the cash budget important in the master budgeting process?

19. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 ones Using fraudulent accounting techniques to meet budget goals 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 Ignoring employee input in budgeting Justifying management decisions by using “backwards budgeting” Disregarding contingencies in budgeting Ignoring external performance measures and benchmarks