Principles of Cost Accounting, 16th Edition, Edward J. VanDerbeck, ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
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Chapter 7
The Master Budget and
Flexible Budgeting
Learning Objectives
Explain the general principles involved in
the budgeting process.
Identify and prepare the components of
the master budget.
Identify and prepare components of the
flexible budget.
Learning Objectives (cont.)
Explain the procedures to determine
standard amounts of factory overhead at
different levels of production.
Budgeting
• A master budget is prepared prior to the
beginning that is based on the company’s
planned accomplishments.
• A flexible budget is prepared after the fact
to compare the actual operating results
what should have occurred, given the level
of operations achieved for the period.
Budgeting
• Most successful companies today use
operating budgets to help them in their
constant effort to analyze and control
operations.
• A budget is a planning device that helps a
company set goals and that serves as a
gauge against with actual results can be
measured.
Principles of Budgeting
The general principles of budgeting have
several requirements:
• Management must clearly define its
objectives.
• Goals must be realistic and possible to
attain.
• The budget must carefully consider global
economic developments, the general
business and industry-specific climate,
Principles of Budgeting
and consumer and supplier behavior.
• Historical data should be used only as a
stepping-off point.
• There must be a plan, which is consistently
followed, to analyze actual operating
results and compare them to the budget.
• The budget must be flexible enough so that
it can be modified in the light of changing
conditions.
Principles of Budgeting
• Responsibility for forecasting costs and
accountability for actual results must be
identified with specific members of the
organization.
Preparing the Master Budget
• The master budget is prepared for a single
level of volume based on management’s
best estimate of the level of production
and sales for the coming period.
Preparing the Master Budget
Flexible Budgeting
• The flexible budget is prepared for a range
of activities within which the firm may
operate.
Flexible budget for Factory
Overhead
• Standard production is the volume on
which the initial calculation of costs is
based.
• Several approaches may be used to
determine this figure based on a choice of
several definitions of manufacturing
capacity.
Flexible budget for Factory
Overhead
Types of capacity include:
• Theoretical capacity
• Practical capacity
• Normal capacity
Flexible budget for Factory
Overhead