Master Budgeting

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• Master Budgeting
• And
• Responsibility Accounting

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Purposes of Budgeting Systems

• Budget
• a detailed plan, expressed in quantitative terms,
  that specifies how resources will be acquired and
  used during a specified period of time.

• Planning
• Facilitating Communication and Coordination
• Allocating Resources
• Controlling Profit and Operations
• Evaluating Performance and Providing Incentives

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Types of Budgets
Capital budgets with acquisitions that normally
cover several years.
L o n g R a n g e B u d g e t s
Continuous or Rolling Budget
2005
2006
2007
2008
This budget is usually a twelve-month budget
that rolls forward one month as the current
month is completed.
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Types of Budgets
Detail Budget
Detail Budget
Detail Budget
Materials
Master Budget Covering all phases of a
companys operations.
Production
Sales
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Sales of Services or Goods
Ending Inventory BudgetWork in Process and
Finished Goods
Production Budget
Direct Materials Budget
Selling and Administrative Budget
Direct LaborBudget
Overhead Budget
Cash Budget
Ending Inventory BudgetDirect Materials
Budgeted Financial Statements
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Sales Budget

• Breakers, Inc. is preparing budgets for the
  quarter ending June 30.
• Budgeted sales for the next five months are
• April 20,000 units
• May 50,000 units
• June 30,000 units
• July 25,000 units
• August 15,000 units.
• The selling price is 10 per unit.

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Sales Budget
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Production Budget
Completed
Production must be adequate to meet
budgeted sales and provide for sufficient ending
inventory.
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Production Budget

• The management of Breakers, Inc. wants ending
  inventory to be equal to 20 of the following
  months budgeted sales in units.
• On March 31, 4,000 units were on hand.
• Lets prepare the production budget.

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Production Budget
From sales budget
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Production Budget
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Production Budget
March 31 ending inventory
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Production Budget
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Production Budget
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Direct-Material Budget

• At Breakers, five pounds of material are required
  per unit of product.
• Management wants materials on hand at the end of
  each month equal to 10 of the following months
  production.
• On March 31, 13,000 pounds of material are on
  hand. Material cost .40 per pound.
• Lets prepare the direct materials budget.

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Direct-Material Budget
From ourproduction budget
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Direct-Material Budget
10 of the following months production
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Direct-Material Budget
March 31 inventory
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Direct-Material Budget
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Direct-Material Budget
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Direct-Labor Budget

• At Breakers, each unit of product requires 0.1
  hours of direct labor.
• The Company has a no layoff policy so all
  employees will be paid for 40 hours of work each
  week.
• In exchange for the no layoff policy, workers
  agreed to a wage rate of 8 per hour regardless
  of the hours worked (No overtime pay).
• For the next three months, the direct labor
  workforce will be paid for a minimum of 3,000
  hours per month.
• Lets prepare the direct labor budget.

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Direct-Labor Budget
From our production budget
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Direct-Labor Budget
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Direct-Labor Budget
This is the greater of labor hours required
or labor hours guaranteed.
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Direct-Labor Budget
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Overhead Budget

• Here is Breakers Overhead Budget for the quarter.

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Selling and Administrative Expense Budget

• At Breakers, variable selling and administrative
  expenses are 0.50 per unit sold.
• Fixed selling and administrative expenses are
  70,000 per month.
• The 70,000 fixed expenses include 10,000 in
  depreciation expense that does not require a cash
  outflows for the month.

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Selling and Administrative Expense Budget
From our Sales budget
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Selling and Administrative Expense Budget
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Selling and Administrative Expense Budget
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Cash Receipts Budget

• At Breakers, all sales are on account.
• The companys collection pattern is
• 70 collected in the month of sale,
• 25 collected in the month following sale,
• 5 is uncollected.
• The March 31 accounts receivable balance of
  30,000 will be collected in full.

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Cash Receipts Budget
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Cash Receipts Budget
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Cash Disbursement Budget

• Breakers pays 0.40 per pound for its materials.
• One-half of a months purchases are paid for in
  the month of purchase the other half is paid in
  the following month.
• No discounts are available.
• The March 31 accounts payable balance is 12,000.

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Cash Disbursement Budget
140,000 lbs. .40/lb. 56,000
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Cash Disbursement Budget
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Cash Disbursement BudgetContinued

• Breakers
• Maintains a 12 open line of credit for 75,000.
• Maintains a minimum cash balance of 30,000.
• Borrows and repays loans on the last day of the
  month.
• Pays a cash dividend of 25,000 in April.
• Purchases 143,700 of equipment in May and
  48,300 in June paid in cash.
• Has an April 1 cash balance of 40,000.

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Cash Disbursement BudgetContinued
From our Cash Receipts Budget
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Cash Disbursement BudgetContinued
From our Cash Disbursements Budget
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Cash Disbursement BudgetContinued
From our Direct Labor Budget
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Cash Disbursement BudgetContinued
From our Overhead Budget
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Cash Disbursement BudgetContinued
From our Selling and Administrative Expense Budget
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Cash Disbursement BudgetContinued
To maintain a cash balance of 30,000, Breakers
must borrow 35,000 on its line of credit.
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Cash Disbursement BudgetFinancing and Repayment
Ending cash balance for April is the beginning
May balance.
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Cash Disbursement BudgetContinued
Breakers must borrow an addition 13,800 to
maintain a cash balance of 30,000.
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Cash Disbursement BudgetFinancing and Repayment
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Cash Disbursement BudgetContinued
At the end of June, Breakers has enough cash to
repay the 48,800 loan plus interest at 12.
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Cash Disbursement BudgetFinancing and Repayment
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Cash Disbursement BudgetContinued
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Cash Disbursement BudgetFinancing and Repayment
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Budgeted Income Statement
Completed
After we complete the cash budget, we can
prepare the budgeted income statement for
Breakers.
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Budgeted Ending Inventory
Manufacturing overhead is applied on the basis of
direct labor hours.
rounded
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Budgeted Income Statement
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Budgeted Balance Sheet

• Breakers reports the following account balances
  on June 30 prior to preparing its budgeted
  financial statements
• Land - 50,000
• Building (net) - 148,000
• Common stock - 200,000
• Retained earnings - 46,400

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25of June sales of 300,000
11,500 lbs. at .40 per lb.
5,000 units at 4.60 per unit.
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50 of June purchases of 56,800
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Activity-Based Costing versus Activity-Based
Budgeting
Resources
Resources
Activities
Activities
Cost objectsproducts and servicesproduced,
andcustomers served.
Forecast of productsand services to beproduced
andcustomers served.
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Budget Administration

• The Budget Committee is a standing committee
  responsible for . . .
• overall policy matters relating to the budget.
• coordinating the preparation of the budget.

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E-Budgeting

• Employees throughout an organizationcan submit
  and retrieve budget information electronically.
  This tends to streamline the entire budgeting
  process.

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Firewalls and Information Security

• Budget information is extremely sensitive and
  confidential. A firewall is a computer or router
  placed between a companys internal network and
  the internet to control all information between
  the outside world and the companys local network.

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Zero-Base Budgeting

• To receive funding during the budgeting process,
  each activity must be justified in terms of its
  continued usefulness.

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International Aspects of Budgeting

• Firms with international operations face special
  problems when preparing a budget.
• Fluctuations in foreign currency exchange rates.
• High inflation rates in some foreign countries.
• Differences in local economic conditions.

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Budgeting Product Life-Cycle Costs
Product planning and concept Design.
Preliminary design.
Distribution and customer service.
Detailed design and testing.
Production.
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Behavioral Impact of Budgets

• Budgetary Slack Padding the Budget
• People often perceive that their performance will
  look better in their superiors eyes if they can
  beat the budget.
• Bonuses are often based on beating the budget

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Participative Budgeting
Flow of Budget Data
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• Responsibility Accounting

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Responsibility Centers

• A subunit in an organization whose manager is
  held accountable for specified financial results.

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Responsibility Centers

• Cost Center
• Segment has control over the incurrence of
  costs.

The Paint Department in an automobile plant.
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Responsibility Centers

• Profit Center
• Segment has control over both costs and
  revenues.

Company-owned restaurant in a fast-food chain.
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Measuring Management Performance
Evaluation Tool
Cost standards
Contribution income statement
Rate of return on invested funds or residual
income
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Performance Reports
Shows the budgeted and actual amounts, and the
variances between these amounts, of key financial
results appropriate for the type of
responsibility center.
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Activity-Based Responsibility Accounting
Traditional responsibility-accounting systems
tend to focus on the financial performance
measures of cost, revenue, and profit for
subunits of the organization.
Activity-based costing systems associate costs
with the activities that drive those costs. In
activity-based responsibility accounting
attention is directed not only to costs incurred
but also to the activity creating the cost.
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Behavioral Effects of Responsibility Accounting
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Segmented Reporting

• A segment is any part or activity of an
  organization about which a manager seeks cost,
  revenue, or profit data.

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Segmented Reporting
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Key Features of Segmented Reporting

• Contribution format.
• Controllable versus uncontrollable expenses.
• Segmented income statement.

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Segmented Income Statement
ContributionFormat
Costs that cannot be controlled by the segment
manager are isolated.