Managerial Accounting:
An Introduction To Concepts,
Methods, And Uses
Chapter 9
Profit Planning and Budgeting
Maher, Stickney and Weil
Learning Objectives (Slide 1 of
2)

Explain the use of a budget as a tool for
planning and performance evaluation.

Explain how a budget can affect employee
motivation.

Compare the four types of responsibility
centers.

Describe the master budget.
Learning Objectives (Slide 2 of
2)

Explain the difference between a flexible
budget and master budget.

Describe ethical dilemmas in budgeting.

List the components of a comprehensive
master budget. (Appendix 10.1)

Describe an incentive model for accurate
reporting. (Appendix 10.2)
Organizational Plan
 Define its three parts
Describe the Master
Budget
Interaction in Developing the
Master Budget
Organizational
Organizational
Goals
Individual
Long-Range
Strategic Plan
Individual
Goals & Values
Anticipated
Conditions for
Budget Period
Individ. Beliefs
& Expectations
Master Budget
Strategic
Evaluation
Actual Period
Reported
Results
Periodic
Performance
Evaluation
Employee Participation
in Developing Budgets
 Define Participative budgeting –
Performance Evaluation
 Budgets provide estimates of
expected performance
 Comparing budgeted with actual results
provides a basis for evaluating
performance
 Budgets must be prepared for individual
responsibility centers in order to use
them to evaluate performance
Responsibility Centers (Slide 1
of 2)
 Define A responsibility center
Responsibility Centers (Slide 2
of 2)
 Responsibility centers can be
classified as follows (continued):
 Profit centers - mgmt is responsible for
both revenues and costs
 Investment centers - mgmt is
responsible for revenues, costs, and
assets
Discuss Flexible Budgets
 Shows the expected relation between
costs and volumes
 Has two components, what are they?
Explain Cost Hierarchies
Forecasting Sales
 Developing the master budget starts
with forecasting sales
 Various methods and sources used
to obtain sales forecasts include:
 Sales staff
 Market research
 Delphi technique
 Trend analysis
 Econometric Models
Production Budget (Slide 1 of 3)
 The production budget is based on the sales
budget and estimates of beginning and
desired ending inventories
 Production is calculated as follows:
Number of Units to Be Sold
+Units in Ending Inventory
-Units in Beginning Inventory
Units to Be Produced
Production Budget (Slide 2 of
3)
After determining the number of units to
be produced, we can budget for the
following:
 Direct materials - traceable to units
produced and almost always a variable
cost
 Direct labor - traceable to units produced;
usually a variable cost but could be a
fixed cost
Production Budget (Slide 3 of
3)
 We assume direct labor is a variable cost in
this chapter
 Manufacturing overhead - typically
has both variable and fixed
components; variable overhead
varies with units produced, fixed
overhead gives a firm production
capacity
Describe the Marketing and
Administrative Budgets
Discretionary Fixed Costs
 Many “fixed” costs are really discretionary
costs
They are budgeted as fixed costs but if, for
example, the economic conditions look bad,
these costs can be reduced
 Examples: maintenance, advertising
 Discretionary fixed costs should be distinguished
from committed fixed costs, like rent on a factory
building, which are required to run the firm
Comment on the Budgeted
Income Statement
Discuss the Need for
Accurate Forecasts
Using the Master Budget
 What does the master budget include?
Compare Flexible
and Master Budgets
Budgeting in
Nonprofit organizations
 The master budget is important in
nonprofit organizations
 Used as a basis for authorizing the
expenditure of funds
 In governmental units, the budget is a
legal authorization for expenditure
 Penalties for exceeding authorized
expenditures can be severe
Review Ethical Issues in
Budgeting
Review Ethical Issues in
Budgeting
If you have any comments or suggestions concerning this
PowerPoint Presentation for Managerial Accounting, An Introduction
To Concepts, Methods, And Uses, please contact:
Dr. Michael Blue, CFE, CPA, CMA
blue@bloomu.edu
Bloomsburg University of Pennsylvania