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Chapter 22Master Budgets
Chapter 22 Learning Objectives
1. Describe budgeting objectives, benefits, and procedures and how human behavior influences budgeting
2. Define budget types and the components of the master budget
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Chapter 22 Learning Objectives
3. Prepare an operating budget for a manufacturing company
4. Prepare a financial budget for a manufacturing company
5. Prepare an operating budget for a merchandising company
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Chapter 22 Learning Objectives
6. Prepare a financial budget for a merchandising company
7. Describe how information technology can be used in the budgeting process
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Learning Objective 1
Describe budgeting objectives, benefits, and procedures and how human behavior influences budgeting
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WHY DO MANAGERS USE BUDGETS?
• A budget is a financial plan that managers use to coordinate a business’s activities.
• Managers use budgets to:– Develop strategies– Plan and budget for specific actions to achieve
goals– Implement plans– Take corrective action
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Budgeting Objectives
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Budgeting Benefits
• Budgeting requires managers to plan for the company’s future.
• A budget coordinates a company’s activities.
• A budget provides a benchmark that motivates employees and helps managers evaluate performance.
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Budgeting Benefits
• Budgeting requires managers to plan for the company’s future.– Decisions are based on this formalized plan
• Creating a budget facilitates coordination and communication.
• Budgets provide a benchmark that motivates employees and helps managers evaluate performance.– Benchmarking is the practice of comparing a
company with its prior performance or with best practices from other companies.
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Budgeting Procedures
• To achieve the benefit of motivating employees, the budget should include input from all levels of the company.
• A participative budget is a budgeting process where those individuals who are directly impacted by a budget are involved in the development of the budget. – These budgets tend to be achievable because
those directly impacted by the budget help to create the plan.
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Budgeting and Human Behavior
• Managers must: – Support the budget – Show employees how budgets can help them
achieve better results– Require that employees participate in
developing the budget• Budgetary games:
– Budgetary slack occurs when managers intentionally understate expected revenues or overstate expected expenses.
– Another game is “spend it or lose it.”
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Learning Objective 2
Define budget types and the components of the master budget
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WHAT ARE THE DIFFERENT TYPES OF BUDGETS?
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Types of budgets
Strategic budget
Long‐term financial plan
Long‐term goals
Operational budget
Short‐term financial plan
Short‐term goals
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WHAT ARE THE DIFFERENT TYPES OF BUDGETS?
• Some companies will use the previous year’s results to create a budget and modify for expected changes. – Managers must only justify changes to budget
from the previous year’s actual results.• Budgets can also be developed using a zero-
based budget where all revenues and expenses must be justified for each new period.– The previous year’s actual results are ignored
under this approach.
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Static and Operational Budgets
• A strategic budget is a long-term financial plan used to coordinate the activities needed to achieve the long-term goals of the company.
• An operational budget is a short-term financial plan used to coordinate the activities needed to achieve the short-term goals of the company.
• A continuous budget is a type of operational budget that involves continuously adding one additional month as each month goes by.
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Static and Flexible Budgets
• A static budget is a budget prepared for only one level of sales volume.
• A flexible budget is a budget prepared for various levels of sales volume.
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Master Budgets
• A master budget is a set of budgeted financial statements and supporting schedules for an entire organization.
• An operating budget is a set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into the cash budget and then the budgeted financial statements.
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Master Budgets
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Master Budgets
• A capital expenditures budget presents a company’s plan for purchasing long-term assets.
• A financial budget includes the cash budget and the budgeted financial statements.
• The cash budget details how the business expects to go from the beginning cash balance to the desired ending cash balances.
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Learning Objective 3
Prepare an operating budget for a manufacturing company
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HOW ARE OPERATING BUDGETS PREPARED FOR A MANUFACTURING COMPANY?
• The master budget includes the following budgets:– Sales budget– Production budget– Direct materials budget– Direct labor budget– Manufacturing overhead budget– Cost of goods sold budget– Selling and administrative expense budget
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HOW ARE OPERATING BUDGETS
PREPARED FOR A MANUFACTURING
COMPANY?
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Sales Budget
The forecast of sales revenue is the cornerstone of the master budget.
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Production Budget
The production budget is the basis for product costs budgets: direct materials budget, direct labor budgets, and manufacturing overhead budgets.
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Production Budget
Smart Touch Learning desires to have an ending inventory each quarter equal to 20% of the next quarter’s sales.
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Production Budget
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Direct Materials Budget
• After completing the production budget, Smart Touch Learning needs to determine the product costs for the tablets.
• The direct materials budget estimates the amount of materials to purchase to meet the company’s production needs.
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Direct Materials Budget
The company desires the ending balance in Raw Materials Inventory to be 40% of the next quarter’s budgeted direct materials needed for production.
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Direct Labor Budget
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The direct labor budget estimates the direct labor hours and related cost needed to support the production budget.
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Manufacturing Overhead Budget
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• The manufacturing overhead budget estimates the variable and fixed manufacturing overhead needed to meet the company’s production needs.
• The predetermined overhead allocation rate is used to allocate the indirect overhead costs to the tablets produced by Smart Touch Learning.
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Manufacturing Overhead Budget
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Cost of Goods Sold Budget
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• The cost of goods sold budget estimates the cost of goods sold based on the company’s projected sales.
• The cost of goods sold budget starts by calculating the projected cost to produce each tablet in 2021.
Cost of Goods Sold Budget
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Selling and Administrative Expense Budget
• The cost accountant works with the office and sales managers to develop the selling and administrative expense budget.
• The selling and administrative expense budget estimates the selling and administrative expenses needed to meet the company’s projected sales.
• Cost behavior is also considered for this budget, with costs designated as variable or fixed.
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Selling and Administrative Expense Budget
Smart Touch Learning projects the following selling and administrative costs for 2021:
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Selling and Administrative Expense Budget
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Learning Objective 4
Prepare a financial budget for a manufacturing company
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HOW ARE FINANCIAL BUDGETS PREPARED FOR A MANUFACTURING COMPANY?
• The financial budgets include the cash budget and the budgeted financial statements:– Budgeted income statement– Budgeted balance sheet– Budgeted statement of cash flows
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Capital Expenditures Budget
• The purchase of long-term assets is part of a strategic plan.
• Capital expenditures are purchases of long-term assets, such as: – Delivery trucks– Computer systems– Office furniture– Manufacturing equipment
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Cash Budget
• The cash budget pulls information from the other budgets previously prepared.
• The cash budget has three sections:– Cash receipts– Cash payments– Short-term financing
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Cash Payments
• Capital expenditures• Product costs:
– Direct materials purchases– Direct labor costs– Manufacturing overhead costs
• Selling and administrative expenses
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Short-term Financing
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Budgeted Income Statement
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The following is a summary of the sources used to calculate the budgeted income statement:
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Budgeted Income Statement
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Budgeted Balance Sheet
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Learning Objective 5
Prepare an operating budget for a merchandising company
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HOW ARE OPERATING BUDGETS PREPARED FOR A MERCHANDISING COMPANY?
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Sales Budget
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Inventory, Purchases, and Cost of Goods Sold Budget
• The cost of goods sold computation shows the relationship between inventory, purchases, and ending inventory:
• The equation can be rearranged to find the amount of purchases required:
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Inventory, Purchases, and Cost of Goods Sold Budget
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Selling and AdministrativeExpense Budget
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Learning Objective 6
Prepare a financial budget for a merchandising company
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HOW ARE FINANCIAL BUDGETS PREPARED FOR A MERCHANDISING COMPANY?
• The budgets for a merchandising company include:– Capital expenditures budget– Cash budget– Budgeted income statement – Budgeted balance sheet
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Cash Receipts
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Cash Payments
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Short-term Financing
• Companies often borrow funds to maintain a minimum cash balance.
• For example, Greg’s Games borrows cash in $1,000 increments at an annual interest rate of 12%.
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Budgeted Balance Sheet
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Learning Objective 7
Describe how information technology can be used in the budgeting process
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HOW CAN INFORMATION TECHNOLOGY BE USED IN THE BUDGETING PROCESS?
• Conduct sensitivity analysis.– Technology makes it cost-effective to perform
comprehensive sensitivity analyses.– Sensitivity analysis provides a better
understanding of how changes in sales and costs are likely to affect the company’s bottom line.
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HOW CAN INFORMATION TECHNOLOGY BE USED IN THE BUDGETING PROCESS?
• Combine individual unit budgets to create the companywide master budget.– Companies use budget-management software
to combine the budget data from multiple segments for financial statements.
– Managers spend less time compiling and summarizing data and more time analyzing and making decisions to ensure that the budget leads the company to achieve its key strategic goals.
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