Chapter 8:
The Master Budget
Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn
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Learning Objectives
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How are strategic planning and tactical planning related to
budgeting?
What is the starting point of a master budget and why?
What are the various components of a master budget and
how are they prepared?
Why is the cash budget so important in the master
budgeting process?
How and why are budgeted financial statements prepared
at the end of the budgeting process?
What benefits are provided by a budget?
(Appendix) How does a budget manual facilitate the
budgeting process?
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Management and Planning
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Planning is the cornerstone of effective
management.
Budgeting—Formalizes plans and translates
qualitative narratives into a documented,
quantitative format
Budget—Expresses a commitment to
planned activities and resource acquisition
and use
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The Planning Process
Strategic
Planning
Tactical
Planning
Budget
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Strategic Planning
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Strategic
Planning
Long term (5 to 10 years)
Top-level management
Long-range goals, strategies, and
policies
Foundation for short-term planning
Identify and gather information on key
variables, both internal and external
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Strategic Planning
Strategic
Planning
 Effective strategic planning
requires that managers build
plans and budgets that
integrate external
considerations and influences
with internal factors
Core competencies
 Product development
 Product life cycles

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External Key Variables
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Strategic
Planning
Competitor actions
Local and global market conditions
Political/regulatory climates
Current and emerging technology issues
Outsourcing opportunities
Consumer trends and attitudes
Demographics
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Tactical Plans
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Tactical
Planning
Short term (1 to 18 months)
Top and middle management
Specific objectives and means to
achieve strategic plans
Basis against which results can be
measured
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budgets
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Budget
Communicate objectives, constraints, and
expectations
Provide financial predictions
Provide nonfinancial performance goals and
objectives
Identify potential difficulties
Determine resource allocation and
constraints
Permit control through budget-to-actual
comparisons
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budgeting
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Budget
Short term
Top, middle, and operational management
involvement
Usable guidelines to implement strategic and
tactical plans
Allocates resources
Standard against which performance can be
measured
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Planning Relationships
Strategic
Planning
Top
Management
Tactical
Planning
Top and
Middle
Management
Top, Middle,
and
Operational
Management
Budget
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The Control Phase
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Budget
Actual-to-budget comparisons
Determining and investigating
variances
Corrective action
Feedback to operating managers
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Master Budget
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Budget
A comprehensive set of budgets,
budgetary schedules, and pro forma
organizational financial statements
For a specific period of time
Static—based on a single level of output
demand
Interactive—departments generate and
consume information
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Master Budget
Budget
Operating Budgets
Financial Budgets
Sales Budget
Production Budget
Purchases Budget
Direct Labor Budget
Overhead Budget
Selling & Administrative
Budget
Cash Budget
Capital Expenditures
Budget
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained
Earnings
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sales Budget
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Sales forecast
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Ask sales personnel
Extrapolate past trends
Use market research
Employ statistical models and simulation
*
=
Units to be sold
Selling price per unit
Dollars of sales
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Operating Budget
Sales Budget
Production Budget
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Production Budget
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Production manager combines
Sales estimates
 Beginning inventory targets
 Ending inventory targets
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Determines the types, quantities, and
timing of products to be manufactured
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Ending Inventory Policy
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Percentage of next period’s projected
sales
Constant amount
Buildup of inventory for high-demand
periods
Near zero in just-in-time systems
Cost of holding inventory includes
storage, insurance, obsolescence,
shrinkage, damage
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Operating Budget
Sales Budget
Production Budget
Purchases Budget
Direct Labor Budget
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Direct Labor Budget
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Total number of people
Specific types of workers
Production hours needed
Costs
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Union contracts
Minimum wage laws
Fringe benefit costs
Payroll taxes
*
=
*
=
Units to be produced (or DM components)
Standard time allowed per unit
Standard labor time allowed
Per hour direct labor cost
Total direct labor cost
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Operating Budget
Sales Budget
Production Budget
Purchases Budget
Overhead Budget
Direct Labor Budget
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Overhead Budget
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Identify activity base
Estimate overhead costs
Separate costs as fixed or variable
Show total costs for operating budgets
Show costs without depreciation for cash budgets
*
=
+
=
Predicted activity base
Variable overhead rate per unit of activity
Total variable overhead cost
Fixed overhead cost
Total overhead cost
=
Total cost without depreciation
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Operating Budget
Sales Budget
Production Budget
Purchases Budget
Selling
& Admin
Budget
Overhead Budget
Direct Labor Budget
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Selling and Administrative Budget
Predicted sales dollars (or other measure)
* Variable S&A rate per dollar
= Total variable overhead cost
+ Fixed S&A cost
= Total S&A cost
= Total cost without depreciation
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Financial Budget
Cash Budget
Operating
Budget
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cash Budget
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Highlights importance of cash for organization’s continued
existence
Translates accrual-based information into cash flows
Indicates effectiveness of credit practices
Allows for planned cash borrowing or investing
Used to prepare pro forma Cash Flow Statement
+
=
–
=
–
=
+/–
=
Beginning cash balance
Cash receipts (collections)
Cash available for disbursements
Cash disbursements
Cash excess or deficiency
Minimum desired cash balance
Cash needed/available for investment or loan repayment
Various financing measures
Ending cash balance
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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cash Collections/Disbursements
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Collections
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Sales
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Cash
Accounts Receivable
Disbursements
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Purchases
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Cash
Accounts Payable
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cash Collections/Disbursements
From
Nov
Dec
Jan
Feb
Mar
Total
Receipts/Disbursements
Jan Feb Mar Total
Percentage of
cash
received/paid
during the
month
Reduced by
discounts and
estimated
uncollectible
accounts
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How to Improve Cash Flow
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Establish sound credit
practices
Expedite fulfillment and
shipping
Bill promptly and accurately
Offer discounts for prompt
payments
Aggressively follow up on
past due accounts
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Deposit payments promptly
Seek better payment terms
from suppliers/banks
Keep tight control of
inventory
Review and reduce
expenses
Pay bills on time but never
before they are due
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Financial Budget
Cash Budget
Operating
Budget
Capital Budget
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Capital Budget
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Long-term fixed asset needs
Plant
 Equipment
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Payment points
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The Financial Budget
Cash Budget
Operating
Budget
Capital Budget
Income
Statement/
Cost of Goods
Manufactured
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Financial Budget
Cash Budget
Income
Statement/
Cost of Goods
Manufactured
Capital Budget
Operating
Budget
Statement of
Retained Earnings
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budgets Provide
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Budget
Guide to align activities and resources
with organizational goals
Vehicle to promote employee
participation, cooperation, and
departmental coordination
Tool to enhance planning, controlling,
problem solving, and evaluating
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Budgeting Provides
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Budget
Basis to sharpen responsiveness to
internal and external factors
Model to view future performance and
consider alternative measures
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budgeting Terms
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Continuous budgeting
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Intentional underestimation of revenue
Intentional overestimation of expenses
Participatory budget
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12-month rolling budget
Budget slack
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Budget
Developed by top management and operating personnel
Imposed budgets
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Developed by top management
Imposed on operating personnel
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Activity Budget
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Budget
Connect line items in budget to list of
activities
Raise awareness of non-value-added
activities
Question and reduce non-value-added costs
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budget Manual (Appendix)
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Budget
Statements of budgetary purpose and its
desired results
Listing of specific budgetary activities to be
performed
Calendar of scheduled budgetary activities
Sample of budgetary forms
Original, revised, and approved budgets
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Questions
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How are strategic and tactical planning
related to budgeting?
In what order are the master budget
schedules prepared?
Why is the cash budget important in the
master budgeting process?
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Potential Ethical Issues (1 of 2)
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Using a single budget system globally that may
conflict with national cultures
Permitting budget slack
Distorting budgeting process by treating shortterm conditions as long-term conditions
Using fraudulent accounting techniques to meet
budget goals
Ignoring employee input in budgeting
Justifying management decisions by using
“backwards budgeting”
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Potential Ethical Issues (2 of 2)
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Disregarding contingencies in budgeting
Ignoring external performance measures and
benchmarks
Failure to communicate “big picture”
assumptions to all managers participating in
the budget process
Promoting “spend-it-or-lose-it” attitudes to
punish cost savings and reward spending
Mandating “across-the-board” budget cuts
without considering alternative cost reductions
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