CHAPTER 20
MASTER BUDGETS AND PERFORMANCE PLANNING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe the importance and
benefits of budgeting and the
process of budget
administration.
1, 2, 3, 4, 5, 6,
9, 12, 13, 14
20-1, 20-2
20-1
20-3, 20-5,
20-7
C2. Describe a master budget and
the process of preparing it.
7, 8, 10, 11
20-3
20-2
20-1
20-4, 20-8
Analytical objectives:
A1. Analyze expense planning
using activity-based budgeting.
20-31, 20-32
20-34
20-6
Procedural objectives:
P1. Prepare each component of a
master budget and link each to
the budgeting process.
20-4, 20-5,
20-7, 20-8,
20-9, 20-11,
20-12, 20-13,
20-14, 20-15,
20-16, 20-17,
20-18
20-3, 20-4,
20-5, 20-6,
20-7, 20-8,
20-9, 20-10,
20-11, 20-12,
20-13, 20-14,
20-15, 20-16
20-1, 20-4
20-8, 20-9
P2. Prepare a cash budget.
11
20-6, 20-10,
20-19, 20-20,
20-21, 20-22,
20-23, 20-24
20-17, 20-18,
20-19, 20-20,
20-21, 20-22
20-2, 20-4
20-1, 20-2
P3 Prepare budgeted financial
statements.
20-25
20-3, 20-4
P3 Prepare each component of a
master budget and link each to
the budgeting process—for a
merchandising company.
(Appendix 20A)
20-26, 20-27,
20-28, 20-29,
20-30
20-23, 20-24,
20-25, 20-26,
20-27, 20-28,
20-11, 20-12,
20-29, 20-30,
20-31, 20-32,
20-33
20-5, 20-6,
20-7, 20-8
*See additional information below that pertains to these quick studies, exercises and problems.
Additional Information on Related Assignment Material
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Corresponding problems in set B also relate to learning objectives identified in grid on previous page.
Problems 20-5A and 20-6A can be completed using EXCEL. The Serial Problem for Success Systems
starts in this chapter and continues throughout many chapters of the text.
Synopsis of Chapter Revision
Happy Family—New opener and entrepreneurial assignment.
Reorganized chapter for better flow
Used a manufacturing company as the example within the chapter;
merchandising company is covered in the chapter appendix
New section, master budget differences between manufacturer and
merchandiser
Revised exhibit on the sequence of preparing the master budget, for a
manufacturer
Added section on the benefits of budgeting
Reformatted sales budget exhibit to match other exhibits
Streamlined and reformatted several exhibits
Rewrote sections on preparing the direct materials, direct labor, and factory
overhead budgets
Edited selling expense and general and administrative expense budget sections
Rewrote section on preparing the cash budget
Added section on using the master budget
Added Sustainability section using Carnival Cruise Lines
New exhibit on the master budget sequence for a merchandiser
Added several end of chapter assignments
Chapter Outline
I. Budging as a Managerial Tool—coordinates the activities of various
departments to meet the organization’s overall goals.
A. Budget Process process of planning future business activities.
1. BudgetFormal statement of a company’s future short term
financial plans usually expressed in monetary terms.
2. All managers should be involved.
3. Relevant focus of budgeting analysis is future.
4. Focus on future is important because daily operations may
divert management’s attention from planning.
5. Good budgeting system formalizes planning process and
demands relevant input; makes planning an explicit
management responsibility.
B. Benefits of Budgeting—fulfill key managerial functions of
planning and controlling
1. Focuses on future opportunities and threats to the
organization. Makes planning an explicit management
responsibility
2. Control function requires management to evaluate
(benchmark) business operations against some norm.
3. Activities of all departments should contribute to meeting
company’s overall goals. Careful coordination required;
budgeting achieves coordination
4. Written budget clearly documents management plans and
specific action plans to all employees. Informal
communication of business plans can create uncertainty and
confusion.
5. Budgets can be used to motivate employees. Provide goals to
attain or exceed.
C. Budgeting and Human Behavior
1. Budgeting provides standards for evaluating performance and
can affect the attitudes of employees evaluated by them.
2. Three guidelines to ensure positive effect on employees’
attitudes.
a. Employees affected by budget should be involved in its
preparation to increase commitment to meeting it
(participatory budgeting).
b. Budgeted levels of performance must be realistic (goals
must be attainable) to avoid discouraging employees.
c. Evaluation should be made carefully and allow affected
employees to explain reasons for apparent performance
deficiencies.
Notes
Chapter Outline
3. Management must be aware of negative outcomes
a. Employees may understate the sales budget and/or
overstate the expense budget to allow a budgetary slack in
meeting targets.
b. Pressure to meet budgeted results may lead to unethical or
fraudulent behavior.
c. Some employees may spend budgeted amounts even on
unnecessary times to make sure their budgets are not
reduced in the next period
D. Budget Timing and Reporting
1. Usually coincides with the accounting period
2. Most companies prepare annual budgets; usually separated
into monthly or quarterly budgets.
3. Short-term budgets allow quick performance evaluation and
corrective action; reports compare actual results to budgets.
4. Variances are differences between actual and budgeted
amounts; management examines variances to identify areas for
improvement.
5. Budget Timing – Many companies apply continuous budgeting
by preparing rolling budgets; as each budget period passes:
a. New monthly or quarterly budgets are prepared to replace
those that have lapsed.
b. Entire set of budgets for months or quarters that remain is
revised.
c. Management is continuously planning ahead.
E. Budget Committee
1. Without active employee involvement, risk that employees
will feel as if budget fails to reflect their special problems and
needs.
2. Budget figures and estimates more useful if developed through
bottom-up process.
3. Central guidance also needed; budget committee (made up of
department heads and other executives) supplies guidance, and
helps to ensure budgeted amounts are realistic and
coordinated.
4. Budget committee should identify any departmental budget
figures that do not reflect efficient performance; originating
department should justify or adjust figures.
5. Ongoing communication should continue to ensure all parties
accept budget as reasonable, attainable, and desirable.
Notes
Chapter Outline
II. The Master BudgetFormal, comprehensive plan for a company’s
future.
A. Master Budget Components
1. Contains several individual budgets that are linked with each
other to provide a coordinated plan for the company.
2. Typically includes individual budgets for sales, production (or
purchases), various expenses, capital expenditures and cash.
3. Typically begins with the sales budgets and ends with the cash
budget and budgeted financial statements.
4. Sequence required; certain budgets cannot be prepared until
other budgets are complete. Direct Materials and Direct Labor
budgets can’t be prepared until a Production Budget is
prepared.
B. Operating BudgetsFour major types.
1. Sales budget
a. First step in preparing master budget – shows planned unit
sales and expected dollars from those sales
b. Requires careful analysis of forecasted economic and
market conditions, business capacity, proposed selling
expenses, and predictions of unit sales.
c. Participatory budgeting approach ensures greater
commitment to goals, and draws on knowledge and
experience of people involved in activity.
d. More detailed than simple projections of total sales;
includes forecasts of both unit sales and unit prices for
various products, regions, departments, and sales
representatives.
2. Production Budget
a. Whether company manufacturers or purchases the
products it sells, budgeted future sales volume is primary
factor in inventory management decisions.
b. Companies will keep enough inventory on hand to reduce
risk of running short (called safety stock); provides
protection against lost sales caused by unfulfilled
customer demands or delays in shipments from suppliers.
c. A manufacturer will prepare a production budget. Sales
budget used as basis for production budget.
d. Units to be produced is determined by:
Budgeted unit sales
+ Budgeted ending inventory units (safety stock)
Required units needed for the period
– number of units in beginning Inventory
Total units to be produced in the period
Notes
Chapter Outline
e. The production budgeted is used as basis for three
manufacturing budgets.
i. Direct Materials Budget:
shows budgeted costs for direct materials that will be
needed to be purchased to satisfy the estimated
production for the period.
Units to be produced
x Material requirements per unit
Materials needed for production
+ Desired ending inventory of direct materials
Total required materials
– Beginning inventory of direct materials
Direct materials to be purchased
x Materials price per unit of materials
Budgeted cost of direct materials purchases
ii. Direct Labor Budget:
shows budgeted costs for direct labor that will be
needed to satisfy the period’s estimated production.
Units to be produced
x Labor requirement per unit (hours)
Total direct labor hours needed
x Labor rate per hour
Labor dollars
iii. Factory Overhead Budget:
shows budgeted costs for factory overhead that will be
needed to complete the estimated production:
Units to be produced
x Variable overhead rate
Budgeted variable overhead
+ Budgeted fixed overhead
Budgeted total overhead
iv. Computing Product cost per unit
With the information from the 3 manufacturing
budgets, the product cost per unit can be computed.
This unit cost is helpful in computed cost of goods
sold for the budgeted income statement.
Direct materials: qty per unit x DM cost
Direct labor: dlh per unit x cost per DLH
Variable overhead: rate given on the budget
Fixed overhead: total Fixed OH/# units
total unit cost sum of the different unit costs
Notes