978-1111971724 Kinney 9e IM Ch 08 Lecture Note Part 1

Learning Objectives

1. How are strategic planning and tactical planning related to budgeting?

2. What is the starting point of a master budget and why?

process?

6. What benefits are provided by a budget?

7. (Appendix) How does a budget manual facilitate the budgeting process?

THE MASTER BUDGET

CHAPTER

8

Chapter 08: The Master Budget IM 2

publicly accessible website, in whole or in part.

Terminology

Budget: a financial plan for the future based on a single level of activity; the quantitative expression of a

Budget manual: a detailed set of documents that provides information and guidelines about the

budgetary process

Continuous budget: an on-going 12-month budget maintained by successively adding a new budget

month (12 months into the future) as each current month expires

Master budget: the comprehensive set of budgets, budgetary schedules, and pro forma organizational

financial statements

Operating budget: a budget expressed in both units and dollars; includes components of the various pro

forma financial statements such as a sales budget, production budget, purchases budget, direct labor

budget, overhead budget, and selling and administrative budget

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Lecture Outline

LO.1: How are strategic planning and tactical planning related to budgeting?

A. Introduction

1. Planning is the cornerstone of effective management and in complex situations successful

company performance.

a. A goal without a plan is just a wish.

B. The Budgeting Process

1. Budgeting is the process of formalizing plans and translating qualitative narratives into a

documented, quantitative format.

resource acquisition and use.

b. A budget is a type of standard that allows variances to be computed and feedback about

2. Strategic Planning

organization achieve those goals.

b. Key variables that are believed to be the direct causes of the achievement or

8.1 p. 303).

i. Internal factors are those under the control of management (e.g., access to resources

ii. External factors are noncontrollable variables such as competitor actions and the

objectives and how to achieve them.

i. This requires organizing complex activities, managing diverse resources, and formalizing

plans.

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3. Tactical Planning

a. Tactical planning is the process of determining the specific means or objectives by which

i. Such short-term tactical plans are considered “single use” plans and have been

planning, and budgeting.

c. A well-prepared budget can effectively communicate objectives, constraints, and

expectations to personnel throughout an organization about:

budget.

i. The greater the employee participation in the budgeting process, the greater the time and

cost involved.

ii. Budgets developed with significant employee participation are said to be built from the

guidelines for company activities.

i. Management must review the budget prior to its approval and implementation in order to

f. A budget, having been accepted, is then implemented and becomes a performance

benchmark.

to operating managers.

ii. Feedback, both positive and negative, is essential to the control process and must be

g. The budgeting process results in the preparation of a master budget.

i. The master budget is a comprehensive set of budgets, budgetary schedules, and

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publicly accessible website, in whole or in part.

LO.2: What is the starting point of a master budget and why?

C. The Master Budget

1. The master budget includes both the operating and financial budgets as illustrated in text Exhibit

8.4 (p. 305).

a. An operating budget is a budget that is expressed in both units and dollars.

i. It includes components of the various pro forma financial statements:

 Sales budget;

b. A financial budget is a budget that aggregates monetary details from the operating budgets.

i. It includes the following components:

 Capital expenditures budget;

 Cash budget;

2. The master budget is prepared for a specific time period and is static (rather than flexible) in the

sense that it is based on a single level of output demand.

a. The budget is typically prepared for a year and then subdivided into quarterly and monthly

periods.

3. The budgetary process begins with sales.

a. The output level of sales or service quantities selected for use in the master budget

i. Text Exhibit 8.5 (p. 306) illustrates the budgetary process showing how the various

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publicly accessible website, in whole or in part.

b. The process begins with the sales department’s estimates of the types, quantities, and timing

of sales.

c. The production manager combines sales estimates with information from purchasing, human

d. The treasurer combines the sales estimates with cash collection patterns and the production

D. The Master Budget Illustrated

1. Text Exhibit 8.7 (p. 308) presents the beginning balance sheet for Dresdill Corp., which is used

in the text to illustrate the preparation of the master budget.

a. The sales budget is prepared in both units and sales dollars; dollar sales figures are

2. Production Budget

managers can schedule the necessary production:

Units to be sold + desired ending units = total needs – beginning units = Units to be

produced

c. Ending inventory policy is generally specified by company management, and desired ending

3. Purchases Budget

a. Direct material must be purchased each period in quantities sufficient to meet production

b. Companies may have different policies for the direct material associated with different

products (see text Exhibit 8.10 p. 310).

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publicly accessible website, in whole or in part.

d. The budget is subsequently converted to individual direct material component requirements

4. Personnel Budget

a. The personnel budget reports labor requirements for the factory, sales force, and office staff.

i. Budgets are prepared in terms of total number of people, specific number of worker types

5. Direct Labor Budget

a. The direct labor budget consists of direct labor cost estimates that are based on the standard

b. The average wage rate includes the direct labor payroll rate, payroll taxes, and fringe

6. Overhead Budget

a. The overhead budget shows the estimated cost of each overhead item for the period(s) (see

b. All fixed and variable overhead costs must be specified, and mixed costs must be separated

7. Selling and Administrative Budget

a. The selling and administrative (S&A) budget includes the estimated selling and administrative

b. The operating expenses for each month can be predicted in the same fashion as overhead

costs.

preparing this budget.

8. The Capital Budget

a. Capital budgeting is the process of assessing an economic entity’s long-term needs in the

b. Although the capital budget (see text Exhibit 8.14 p. 312) is prepared separately from the

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publicly accessible website, in whole or in part.

LO.4: Why is the cash budget so important in the master budgeting process?

9. The Cash Budget

a. The cash budget might be the most important schedule prepared during the budgeting

i. A basic model for the cash budget is provided in the text at the beginning of this section.

b. Cash Receipts and Accounts Receivable

example and text Exhibits 8.15 and 8.16 (p. 314).

ii. The balances of the Accounts Receivable, Allowance for Uncollectibles, and Sales

c. Cash Disbursements and Accounts Payable

payable using the purchases information.

ii. Purchases are translated into actual cash disbursements through the use of an expected

iii. The activity in the Accounts Payable account is illustrated in a T-account in the text.

scheduled collections, payments, and discounts taken.

i. Cash flow provides the short-run source of power in a business to negotiate and act.

ii. Text Exhibit 8.19 (p. 319) provides ten ways for a small business to improve its cash

flow.

process?

10. Budgeted Financial Statements

a. Budgeted financial statements are prepared for the period(s) and reflect the results that will

i. The statements allow management to determine if the predicted results are acceptable