Chapter 9 – Financial Planning and Analysis: The Master Budget
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CHAPTER 9
FINANCIAL PLANNING AND ANALYSIS: THE MASTER BUDGET
Learning Objectives
1. Explain the relationship between financial planning and analysis and the master
budget
2. List and explain five purposes of budgeting.
3. Describe the similarities and differences in the operational budgets prepared by
5. Prepare each of the budget schedules that make up the master budget in a non-
manufacturing firm, and that exist in manufacturing budgets as well.
7. Discuss the role of assumptions and predictions in budgeting.
9. Discuss the behavioral issues in budgeting.
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Chapter Overview
I. Financial Planning and Analysis (FP&A) Systems
A. Purposes of budgeting
B. Types of budgets
2. Pro-forma financial statements
4. Rolling budget
II. The Master Budget: A Planning Tool
A. Sales of services or goods
B. Sales forecasting
C. Operational budgets
III. Activity-Based Budgeting
IV. Developing the Master Budget
A. Sales budget
B. Purchases budget
C. Direct labor budget
V. Extending the Master Budget for a Manufacturing Firm
A. Production budget
VI. Assumptions and Predictions Underlying the Master Budget
A. Financial planning models
VII. Budget Administration
VIII. International Aspects of Budgeting
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b. Participative budgeting
Key Lecture Concepts
I. Financial Planning and Analysis (FP&A) Systems
• A financial planning and analysis (FP&A) system helps managers assess
the company’s future and know if they are reaching their performance
goals.
• A budget is a detailed plan, expressed in quantitative terms, that specifies
how resources will be acquired and used during a given period of time.
• Purposes of budgets:
➢ Planning
➢ Facilitating communicating and coordinating
• Types of budgets
➢ Master budget—a comprehensive set of budgets that covers all
phases of an organization’s operations for a specified period of
time.
➢ Budgeted (pro-forma) financial statements.
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period (e.g., a month) and dropping the period just completed.
II. The Master Budget: A Planning Tool
• The master budget begins with a sales forecast. Items to consider in
deriving a sales forecast include:
➢ Past sales levels and trends
➢ General economic conditions
➢ Industry trends
• Operational budgets, which focus on the operations needed to meet
demand for goods and services, vary from firm to firm. Budgets that fall
in this category for manufacturers, merchandisers, and/or service
• Financing budgets helps to show where money is coming from and
where it will go.
➢ Cash receipts budgets provides information about the cash flows
into the company based on sales of services and/or products.
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III. Activity-Based Budgeting
• Budget construction is enhanced if organizations apply the concept of
activity-based budgeting.
➢ Activity-based budgeting uses a process that is the opposite of
activity-based costing.
▪ First, forecasts are made of products and services to be
➢ Activity-based budgets (ABB) reveal how cost levels will truly
IV. Developing the Master Budget
• Budgets are prepared for a host of different items. Information flows
begin with sales, move to production, and next move to production
elements (such as direct materials, direct labor, and overhead).
• The sales budget shows the projected sales in units and the total expected
sales revenue.
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sales and marketing costs of the company.
• The cash receipts budget, cash disbursements budget, and cash budget
along with budgeted financial statements are also prepared.
Teaching Tip: When talking about the cash budget, be sure to emphasize
that the cash budget has two major objectives: to disclose short-term cash
V. Extending the Master Budget for a Manufacturing Firm
• The production budget shows the number of units that are to be
produced during a budget period.
• The budgeted schedule of cost of goods manufactured and sold shows
the production costs that are expected to flow through the inventory
VI. Assumptions and Predictions Underlying the Master Budget
• Financial planning models assist in the budgeting process. These are sets
of mathematical relationships that express interactions among a firm’s
operational, financial, and environmental events.
➢ Computerized models can be run many times to explore various
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VII. Budget Administration
• The budget director, often the controller, has direct responsibility for
construction of an entity’s budget as well as determination of the
• The budget director often develops and distributes the budget manual. It
• Many companies use a senior-level, executive advisory group (i.e., a
budget committee) to provide insights to the organization’s budget
director.
• Numerous companies have turned to e-budgeting, with employees
throughout organizations submitting and retrieving budget information
via the Internet. (The “e” stands for both electronic and enterprise-wide.)
VIII. International Aspects of Budgeting
• Firms with international operations face added complexities in the process
of budget preparation.
➢ Foreign currencies must be translated into U.S. dollars.
IX. Behavioral Impact of Budgets
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• When budget information comes from many employees, upper
management should be aware of the tendency to pad the budget.
➢ For example, if asked to submit a sales budget, the sales manager
may give a lower figure than he or she really expects. This
procedure is followed so if sales come in higher than the given
number, the sales force will look productive.
• Participative budgeting involves employee participation in the budget-
preparation process at various levels of the organizational hierarchy.
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Teaching Overview
While budgeting is not conceptually difficult, this is nonetheless a demanding chapter.
The assignment problems require a student to switch from accrual-basis accounting on
the pro-forma financial statements to cash-basis accounting on the cash budgets, and
pay significant attention to detail in-between.
I always start this unit by soliciting responses about student experiences with budget
preparation whether it is for an employer or on a personal basis. Some good discussion
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Links to the Text
Homework Grid – CHAPTER 9
Item No.
Learning
Objectives
Completion
Time (min.)
Exercises:
9-21
3, 6
20
9-22
3, 5
25
9-23
3, 5, 6
20
9-24
3, 6
15
9-25
3, 5
20
9-26
2, 3
30
9-27
3, 5
30
9-28
9
20
9-29
2, 5, 7
20
9-30
3, 4, 5
25
Problems:
9-31
3, 5
30
9-32
3, 4, 5, 6
40
9-33
3, 6, 7
40
9-34
5, 7, 8
25
9-35
3, 5, 6
25
9-36
3, 5, 6
30
9-37
2, 3, 5, 6, 8
45
9-38
3, 4, 5, 6
60
9-39
3, 4, 5, 6
60
9-40
2, 5, 7
45
9-41
2, 3, 5, 6, 7
40
9-42
2, 3, 5, 6
120
Cases:
9-43
2, 3, 9
35
9-44
2, 3, 7
60
9-45
2, 3, 5, 6
120
* W = Written response E = Ethical issue G = Group work
I = International C = Internet use S = Spreadsheet