Master Budget and
Responsibility Accounting
Chapter 6
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6-1
Learning Objective 1
Understand what a master budget
is and explain its benefits.
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Budgeting Cycle
Performance planning
Providing a frame of reference
Investigating variations
Corrective action
Planning again
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The Master Budget
Master Budget
Operating
Decisions
Financial
Decisions
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Learning Objective 2
Describe the advantages
of budgets.
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What are the Advantages
of Budgets?
#1
Compels strategic planning
#2
Provides a framework
for judging performance
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6-6
What are the Advantages
of Budgets?
#3
Motivates employees
and managers
#4
Promotes coordination
and communication
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Strategy, Planning, and Budgets
Long-run
Planning
Long-run
Budgets
Short-run
Planning
Short-run
Budgets
Strategy
Analysis
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Time Coverage of Budgets
Budgets typically have a set time
period (month, quarter, year).
This time period can itself be broken
into subperiods.
The most frequently used budget
period is one year.
Businesses are increasingly using
rolling budgets.
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Learning Objective 3
Prepare the operating budget
and its supporting schedules.
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6 - 10
Operating Budget Example
Hawaii Diving expects 1,100 units to be sold
during the month of August 2004.
Selling price is expected to be $240 per unit.
How much are budgeted revenues for the month?
1,100 × $240 = $264,000
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Operating Budget Example
Two pounds of direct materials are budgeted per
unit at a cost of $2.00 per pound, $4.00 per unit.
Three direct labor-hours are budgeted per unit
at $7.00 per hour, $21.00 per unit.
Variable overhead is budgeted at $8.00
per direct labor-hour, $24.00 per unit.
Fixed overhead is budgeted at $5,400 per month.
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Operating Budget Example
Variable nonmanufacturing costs are
expected to be $0.14 per revenue dollar.
Fixed nonmanufacturing costs are
$7,800 per month.
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Production Budget Example
Budgeted sales (units)
+
–
=
Target ending finished goods inventory (units)
Beginning finished goods inventory (units)
Budgeted production (units)
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Production Budget Example
Assume that target ending finished goods
inventory is 80 units.
Beginning finished goods inventory is 100 units.
How many units need to be produced?
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Production Budget Example
Hawaii Diving Production Budget
for the Month of August 2004
Units required for sales
1,100
Add ending inv. of finished units
80
Total finished units required
1,180
Less beg. inv. of finished units
100
Units to be produced
1,080
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Direct Materials Usage Budget
Each finished unit requires 2 pounds of direct
materials at a cost of $2.00 per pound.
Desired ending inventory equals 15% of the
materials required to produce next month’s sales.
September sales are forecasted to be 1,600 units.
What is the ending inventory in August?
480 pounds
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Direct Materials Usage Budget
September sales: 1,600 × 2 pounds per unit
= 3,200 pounds
3,200 × 15% = 480 pounds
(the desired ending inventory)
What is the beginning inventory in August?
1,100 units × 2 × 15% = 330 units
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Direct Materials Usage Budget
How many pounds are needed to produce
1,080 units in August?
1,080 × 2 = 2,160 pounds
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Material Purchases Budget
Hawaii Diving Direct Material Purchases
Budget for the Month of August 2004
Units needed for production
2,160
Target ending inventory
480
Total material to provide for
2,640
Less beginning inventory
330
Units to be purchased
2,310
Unit purchase price
$ 2.00
Total purchase cost
$4,620
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Direct Manufacturing
Labor Budget
Each unit requires 3 direct labor-hours
at $7.00 per hour.
Hawaii Diving Direct Labor Budget
for the Month of August 2004
Units produced:
1,080
Direct labor-hours/unit
3
Total direct labor-hours:
3,240
Total budget @ $7.00/hour:
$22,680
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Manufacturing Overhead Budget
Variable overhead is budgeted at $8.00
per direct labor-hour.
Fixed overhead is budgeted at $5,400 per month.
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Manufacturing Overhead Budget
Hawaii Diving Manufacturing Overhead
Budget for the Month of August 2004
Variable Overhead:
(3,240 × $8.00)
$25,920
Fixed Overhead
5,400
Total
$31,320
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Ending Inventory Budget
Cost per finished unit:
Materials
Labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
*$5,400 ÷ 1,080 = $5
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$ 4
21
24
5*
$54
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Ending Inventory Budget
What is the cost of the target
ending inventory for materials?
480 × $2 = $960
What is the cost of the target
finished goods inventory?
80 × $54 = $4,320
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Cost of Goods Sold Budget
Direct materials used:
2,160 × $2.00
$ 4,320
Direct labor
22,680
Total overhead
31,320
Cost of goods manufactured
$58,320
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Cost of Goods Sold Budget
Assume that the beginning finished
goods inventory is $5,400.
Ending finished goods inventory is $4,320.
What is the cost of goods sold?
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Cost of Goods Sold Budget
Beginning finished goods inventory
+ Cost of goods manufactured
= Goods available for sale
– Ending finished goods inventory
= Cost of goods sold
$ 5,400
$58,320
$63,720
$ 4,320
$59,400
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6 - 28
Nonmanufacturing Costs Budget
Hawaii Diving Other Expenses Budget
for the Month of August 2004
Variable Expenses:
($0.14 × $264,000)
$36,960
Fixed expenses
7,800
Total
$44,760
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6 - 29
Cost of Goods Sold Budget
Hawaii Diving has budgeted sales of
$264,000 for the month of August.
Cost of goods sold are budgeted at $59,400.
What is the budgeted gross margin?
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Budgeted Statement of Income
Hawaii Diving Budgeted Income Statement
for the Month ending August 31, 2004
Sales
$264,000 100%
Less cost of sales
59,400
22%
Gross margin
$204,600
78%
Other expenses
44,760
17%
Operating income
$159,840
61%
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Learning Objective 4
Describe responsibility centers
and responsibility accounting.
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What is a Responsibility Center?
It is any part, segment, or subunit
of a business that needs control.
– production
– service
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Types of Responsibility Centers
Cost center
Investment center
Profit center
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End of Chapter 6
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