ACCT201B- Chapter 7 Notes PDF

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CHAPTER 7 MASTER BUDGETING Master budget: essential management tool that communicates management’s plans throughout the organization, allocates resources, and coordinates activities

Learning Objective 1: Understand why organizations budget and the processes they use to create budgets.  

Budget: detailed plan for the future that is expressed in numbers Used for planning and control o Planning: developing goals and preparing different budgets to achieve goals o Control: gathering feedback to ensure that the plan is being properly executed

ADVANTAGES OF BUDGETING  Communicate management’s plan  Provides a time to think about and plan for the future  Helps allocate resources effectively  Uncover potential bottlenecks before they occur  Coordinate activities within the entire organization  Define goals and objectives RESPONSIBILITY ACCOUNTING  Manager should be held responsible for items that they can control  Personalizes accounting info by holding people responsible for revenues and costs  Make sure that nothing “falls through the cracks”  Purpose is to notice discrepancies, explain them, and to avoid or exploit them CHOOSING A BUDGET PERIOD  Operating budgets usually cover a one year period  Continuous or perpetual budgets o 12 month budget that rolls forward one month as the current month is completed o keeps managers focused at least one year ahead THE SELF IMPOSED BUDGET  successful budget programs have all lower level and higher level managers participating  budget that is prepared with full cooperation and participation of managers at all levels

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ADVANTAGES: o Individuals at all levels are recognized as part of the team o Front line managers are more accurate and reliable because they have hands on experience on daily operations o Motivation is higher when people set their own goals o People can’t say that the budget was impossible to meet because they made it LIMITATIONS: o Lower level managers may not make the best recommendations if they do not understand broader perspectives that top managers have o Can allow lower level managers to create budgetary slack  May create a budget that is easier to attain

HUMAN FACTORS IN BUDGETING  Budgets used to blame employees breeds hostility  Unfortunately can be used as a pressure device THE MSATER BUDGET: AN OVERVIEW  Master budget: number of separate but interdependent budgets that formally lay out the company’s sales, production, and financial goals.  Culminates: o Cash budget: detailed plan showing how cash resources will be acquired and used o Budgeted income statement: estimate of net income for the period  Relies on info from sales budget, ending finished goods inventory, selling and administrative, and cash budget o Budgeted balance sheet: estimates company’s assets, liabilities, and stockholders’ equity at the end of the period  STEP 1: Prepare a sales budget o Detailed schedule showing expected sales for budget period  Sales budget influences selling and administrative budget and production budget.  Product budget determines direct materials, labor, and manufacturing overhead budgets.  Prepare ending finished goods inventory budget  Concludes with cash budget, income statement, and balance sheet. SEEING THE BIG PICTURE  Meant to answer 10 key questions  Based on various estimates and assumptions PREARING THE MASTER BUDGET  Sales Budget

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Production budget Direct materials budget Direct labor budget Manufacturing overhead budget Ending finished goods inventory budget Selling and administrative expense budget Cash budget Budgeted income statement Budgeted balance sheet

Learning Objective 2: Prepare a sales budget, including a schedule of expected cash collections. 

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Learning Objective 3: Prepare a production budget. THE PRODUCTION BUDGET  Prepared after sales budget  Lists number of units that must be produced to satisfy sales needs and to provide for a desired ending finished goods inventory  Excessive inventories o Tie up funds o Create storage problems  Insufficient inventories o Lead to lost sales o Last minute high cost production efforts INVENTORY PURCHASES-MERCHANDISING COMPANY  Merchandising companies use a merchandise purchases budget  Shows amount of goods to be purchased from suppliers during the period  Can be shown in dollars or in units Learning Objective 4: Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials. THE DIRECT MATERIALS BUDGET  Prepared after production requirements have been computed  Details raw materials that must be purchased to fulfill production budget and provide for adequate inventories Learning Objective 5: Prepare a direct labor budget.  Shows direct labor hours required to satisfy production budget  Knowing the amount of labor time needed can help adjust labor force as required

Learning Objective 6: Prepare a manufacturing overhead budget.  Lists all costs of production other than direct materials and direct labor  Expected level of activity is greater than company’s current capacity, fixed costs may have to be increased THE ENDING FINISHED GOODS INVENTORY BUDGET  Cost of unsold units Learning Objective 7: Prepare a selling and administrative expense budget.  Lists budgeted expenses for areas other than manufacturing  Compilation of smaller, individual budgets submitted by department heads o Ex. Marketing manager submits a budget the advertising expenses for a period Learning Objective 8: Prepare a cash budget. THE CASH BUDGET  Receipts o Lists all cash inflows (except financing) expected during budget period o Major source is from sales  Disbursements o Summarizes cash payments that are planned o Include raw material purchases, direct labor payments, manufacturing overhead costs o Also equipment purchases and dividends  Cash excess or deficiency o Is there is excess during the period that is less than minimum required cash balance, the company needs to BORROW money o If it is greater than the minimum cash balance, the company can INVEST or REPAY lenders  Financing o Details borrowings and principal and interest repayments projected to take place during the period Learning Objective 9: Prepare a budgeted income statement. THE BUDGETED INCOME STATEMENT  Revenue and expenses come from data in the beginning balance sheet and data made from previous statements  Shows companies planned profit  Serves as a benchmark against subsequent company performance

Learning Objective 10: Prepare a budgeted balance sheet. THE BUDGETED BALANCE SHEET  Ending Balance in Retained Earnings = Beginning Retain Earnings+ Net Income – Dividends ...