Types of Budgets
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A master budget is a comprehensive set of budgets that
covers all phases of an organization’s operations for a specified
period of time.
Budgeted financial statements (budgeted income
statement, budgeted balance sheet and a budgeted statement
of cash flows) show what an organization’s overall financial
condition is expected to be at the end of the budget period if
operations proceed according to plan.
A capital budget shows planned acquisitions and disposal of
assets, such as land and equipment.
A financial budget outlines how an organization will acquire
financial resources during the budget period.
Budget Planning
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The starting point for the master budget is a sales
revenue budget based on forecast sales of services or
goods.
According to the sales budget, a company develops a
set of operational budgets that specify how its
operations will be carried out to meet the demands
for its goods or services.
• Operational budgets encompass a detailed plan for using the
basic factors of production (material, labor and overhead) to
produce a product or provide a service.
Operational: Production Budget

A production budget shows the number of units of services or
goods that are to be produced during a budget period.
Total units to be
produced and sold
+
Desired ending
=
inventory
Total units needed
Expected
Total units needed
- beginning
inventory
=
Units to
be started
Operational: Direct-Material
Budget
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A direct-material budget shows the amount of material needed
during a budget period.
Raw material
needed for +
production
Desired ending
raw material
inventory
=
Total raw
materials
needed
Total raw
materials
needed
-
Expected
beginning
raw material
inventory
=
Raw material
to be
purchased
International Aspects of Budgets
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A multinational firm’s budget
must reflect the translation of
foreign currency into U.S. dollars.

It is difficult to prepare
budgets when inflation is
high or unpredictable.
Behavioral Impact of Budgets
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The human reactions to the budgeting process can
have considerable influence on a company’s overall
effectiveness.
• If a sales manager’s performance is evaluated on the basis
of a sales budget, then he/she has incentive to give a
conservative sales estimate.
• When a supervisor provides a departmental cost projection
for the budget, there is an incentive to overestimate costs.
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Padding the budget is the process of building
budgetary slack into a budget by overestimating
expenses and underestimating revenues.
Dealing with Budgetary Slack
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
A company can avoid relying on the budget as a
negative evaluation tool.
Managers can be given incentives not only to achieve
budgetary projections but also to provide accurate
projections.
• See the article Tie a salesmen’s bonuses to their forecasts by
Jacob Gonik for a comprehensive discussion of dealing with
budgetary slack.