9-1
Master Budgeting
Chapter 10
Garrison, Noreen, Brewer, Cheng & Yuen
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Learning Objective 1
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The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
Understand why
organizations budget and
the processes they use to
create budgets.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.
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Planning and Control
Planning –
Advantages of Budgeting
Control –
involves developing
objectives and
preparing various
budgets to achieve
those objectives.
3
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Define goals
and objectives
involves the steps taken by
management to increase
the likelihood that the
objectives set down while
planning are attained and
that all parts of the
organization are working
together toward that goal.
Communicate
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
constraint: giới hạn
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9-2
Responsibility Accounting
Choosing the Budget Period
Operating Budget
Managers should be held
responsible for those
items - and only those
items - that they can
actually control
to a significant extent.
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2011
6
8
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Top-down budgeting
Top
Management
Top
Management
Middle
Management
Middle
Management
Lower-level
Management
Lower-level
Management
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Self-imposed budgets should be reviewed
by higher levels of management to
prevent “budgetary slack (or budget
padding).”
1. Individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by top
management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.
3. Motivation is generally higher when individuals participate
in setting their own goals than when the goals are
imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic. Self-imposed
budgets eliminate this excuse.
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How to overcome problems of selfimposed budgets
Advantages of the Bottom-up Budgeting
(Self-Imposed Budgets)
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2014
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Bottom-up budgeting
(Self-imposed budget or
Participative budget )
Understand Basic
Budgeting Terms and the
Behavioral Aspects of
Budgeting.
Garrison, Noreen, Brewer, Cheng & Yuen
2013
Bottom-up and Top-down Budgeting
Learning Objective 2
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2012
Operating budgets ordinarily
A continuous budget is a
cover a one-year period
12-month budget that rolls
corresponding to a company’s
forward one month (or quarter)
fiscal year. Many companies
as the current month (or quarter)
divide their annual budget
is completed.
into four quarters.
10
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9-3
Advantages of the Top-down Budgeting
Budget Lapsing
• A popular method among government agencies,
universities and organizations relying on allocated funds.
1. Avoid the potential budgetary slack (budget padding).
2. Provide a clearer performance goals and expectations
from the top management.
• Any unused funding at the end of the financial period
cannot be carried forward to the following year.
3. May provide better budget due to top management’s
access to privileged/confidential market and organization
information .
• As a result, the following year’s budget may be cut because
of the under-expenditure in the previous year.
4. Provide an efficient budgetary process.
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• A system of reviewing the expenditures near end of the
period may uncover unnecessary expenditures and
discourage managers to wastefully spend because of budget
lapsing.
• It helps provide an opportunity for a clean cut-off of
expenditures and to reallocate any unused resources for
other more appropriate requirements.
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Incremental versus Zero-based Budgets
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• Zero-Based Budgets are prepared based on the
assumption that the company has just started. Therefore,
resources required have to be justified from scratch.
• For example, when budgeting for staff cost for a restaurant,
managers using the zero-based budgeting approach will
ignore the existing staff level and expenses, rather, they
will examine factors such as opening hours, number of
tables, expected patron numbers to work out the number of
staff required at each position and level, hence the
associate costs, to produce a budget.
• While incremental method of budgeting is practical and
fast, any inefficiency in the previous year’s figures may be
carried forward. For example, if all along the organization is
over staffed, then the budget will continually to be allowing
for the over staffing situation under this method.
Garrison, Noreen, Brewer, Cheng & Yuen
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Incremental versus Zero-based Budgets
• Incremental method of budgeting is most commonly
used by companies. Companies start off one year’s budget
by referring back to the previous year’s figures.
Adjustments are then made to the budget to account for
the expected changes such as prices for the next year.
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• Budget lapsing can cause undesired behavior effects. For
example, managers may wastefully spend their entire
budget before the end of the period in order to avoid budget
cuts.
• Budget lapsing helps ensure that the appropriate level of
resources is utilized in each period. Without budget lapsing,
risk-averse managers may unnecessarily accumulate funds
and this may adversely affect the performance of the
organization.
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Garrison, Noreen, Brewer, Cheng & Yuen
Budget Lapsing: Potential Problem &
Solution
Budget Lapsing: Advantages
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9-4
Top Management Attitude:
Human Factors in Budgeting
Incremental versus Zero-based Budgets
The success of a budget program depends on three
important factors:
1. Top management must be enthusiastic and
committed to the budget process.
2. Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3. Budget targets should be challenging but
achievable in order to have good motivational
effects.
• Companies using the zero-based method do not simply
ignore previous years’ figures. Figures generated by the
zero-based method are usually compared with previous
years’ figures. Any large differences are investigated.
• As zero-based budgeting is time consuming and costly,
companies tend to use this method for the relatively large
items and the incremental method for the rest.
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The Budget Committee
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Understand the Key
Components of Master
Budget in Manufacturing,
Merchandising and
Service Industries
 overall policy matters relating to the budget
 coordinating the preparation of the budget
 resolving disputes related to the budget
 approving the final budget
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Learning Objective 3
A standing committee responsible for
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Understand the key components of master budget in
Manufacturing, Merchandising, and Service Industries
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Learning Objective 4
The first step of budgeting for every business is to budget for the
revenue, whether it is a sales budget for providing goods or services or
a funding budget. Although operational budgets are adapted
according to the industries, they are very similar and typically comprise
of budgets for
• Income statement
• Cash
• Balance sheet.
Prepare a Master Budget
for a Manufacturing
Company.
The major differences of different industries include:
• Manufacturing: production budget is involved
• Merchandising: no production budget, only purchase budget of
merchandise is required.
• Service Industries: budget for revenue and cost of providing services
• Not-for-profit: expected funding available and plan usage of funding.
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9-5
The Master Budget: An Overview
Learning Objective 4 (a)
Sales budget
Ending inventory
budget
Direct materials
budget
Selling and
administrative
budget
Production budget
Direct labor
budget
Prepare a sales budget,
including a schedule of
expected cash collections.
Manufacturing
overhead budget
Cash Budget
Budgeted
income
statement
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Budgeted
balance sheet
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Budgeting Example
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The Sales Budget
The individual months of April, May, and June are
summed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30th
 Royal Company is preparing budgets for the
quarter ending June 30.
 Budgeted sales for the next five months are:
April
May
June
July
August
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20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
 The selling price is $10 per unit.
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Expected Cash Collections
Expected Cash Collections
 All sales are on account.
 Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible.
 The March 31 accounts receivable
balance of $30,000 will be collected in full.
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9-6
Expected Cash Collections
Expected Cash Collections
From the Sales Budget for April.
Garrison, Noreen, Brewer, Cheng & Yuen
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From the Sales Budget for May.
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Quick Check 
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Expected Cash Collections
What will be the total cash collections for
the quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000
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Learning Objective 4 (b)
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The Production Budget
Prepare a
production budget.
Sales
Budget
and
Expected
Cash
Collections
Production
Budget
The production budget must be adequate to
meet budgeted sales and to provide for
the desired ending inventory.
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9-7
The Production Budget
The Production Budget
 The management at Royal Company wants
ending inventory to be equal to 20% of the
following month’s budgeted sales in units.
 On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
production=sales + closing inventory - opening inventory
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The Production Budget
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Quick Check 
What is the required production for May?
a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units
March 31
ending inventory
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The Production Budget
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The Production Budget
Assumed ending inventory.
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9-8
Learning Objective 4 (c)
The Direct Materials Budget
Prepare a direct materials
budget, including a
schedule of expected cash
disbursements for
purchases of materials.

At Royal Company, five pounds of material are
required per unit of product.

Management wants materials on hand at the
end of each month equal to 10% of the
following month’s production.

On March 31, 13,000 pounds of material are
on hand. Material cost is $0.40 per pound.
Let’s prepare the direct materials budget.
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The Direct Materials Budget
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The Direct Materials Budget
From production budget
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The Direct Materials Budget
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Quick Check 
How much materials should be purchased in May?
a. 221,500 pounds
b. 240,000 pounds
c. 230,000 pounds
d. 211,500 pounds
March 31 inventory
10% of following month’s
production needs.
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Calculate the materials to
be purchased in May.
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9-9
The Direct Materials Budget
The Direct Materials Budget
Assumed ending inventory
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Expected Cash Disbursement for Materials

Royal pays $0.40 per pound for its materials.

One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid in the
following month.

The March 31 accounts payable balance is
$12,000.
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Expected Cash Disbursement for Materials
Let’s calculate expected cash disbursements.
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Expected Cash Disbursement for Materials
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Quick Check 
What are the total cash disbursements for the
quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400
Compute the expected cash
disbursements for materials
for the quarter.
140,000 lbs. × $0.40/lb. = $56,000
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9-10
Expected Cash Disbursement for Materials
Learning Objective 4 (d)
Prepare a direct
labor budget.
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The Direct Labor Budget

At Royal, each unit of product requires 0.05 hours (3
minutes) of direct labor.

The Company has a “no layoff” policy so all employees
will be paid for 40 hours of work each week.

For purposes of our illustration assume that Royal has a
“no layoff” policy, workers are pay at the rate of $10 per
hour regardless of the hours worked.

For the next three months, the direct labor workforce will
be paid for a minimum of 1,500 hours per month.
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The Direct Labor Budget
From production budget.
Let’s prepare the direct labor budget.
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The Direct Labor Budget
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The Direct Labor Budget
Greater of labor hours required
or labor hours guaranteed.
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9-11
The Direct Labor Budget
Quick Check 
What would be the total direct labor cost for
the quarter if the company follows its no layoff policy, but pays $15 (time-and-a-half) for
every hour worked in excess of 1,500 hours
in a month?
a. $79,500
b. $64,500
c. $61,000
d. $57,000
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Learning Objective 4 (e)
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Manufacturing Overhead Budget
 At Royal, manufacturing overhead is applied to units
of product on the basis of direct labor hours.
Prepare a
manufacturing
overhead budget.
 The variable manufacturing overhead rate is $20 per
direct labor hour.
 Fixed manufacturing overhead is $50,000 per month,
which includes $20,000 of noncash costs (primarily
depreciation of plant assets).
 Let’s prepare the manufacturing overhead budget.
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Manufacturing Overhead Budget
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Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000
= $49.70 per hour *
Total labor hours required 5,050
Direct Labor Budget.
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* rounded
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9-12
Manufacturing Overhead Budget
Ending Finished Goods Inventory Budget
Direct materials
budget and information.
Depreciation is a noncash charge.
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Ending Finished Goods Inventory Budget
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Ending Finished Goods Inventory Budget
Direct labor budget.
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Total mfg. OH for quarter $251,000
= $49.70 per hour *
Total labor hours required 5,050
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Ending Finished Goods Inventory Budget
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Learning Objective 4 (f)
Prepare a selling and
administrative
expense budget.
Production Budget.
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9-13
Selling and Administrative Expense Budget

At Royal, the selling and administrative expense budget is
divided into variable and fixed components.

The variable selling and administrative expenses are $0.50
per unit sold.

Fixed selling and administrative expenses are $70,000 per
month.

The fixed selling and administrative expenses include
$10,000 in costs – primarily depreciation – that are not cash
outflows of the current month.
Selling and Administrative Expense Budget
Let’s prepare the company’s selling and administrative
expense budget.
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Calculate the selling and administrative
cash expenses for the quarter.
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Quick Check 
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Selling Administrative Expense Budget
What are the total cash disbursements for
selling and administrative expenses for the
quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000
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Learning Objective 4 (g)
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Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
Prepare a cash
budget.
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
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9-14
The Cash Budget
The Cash Budget
Assume the following information for Royal:
 Maintains
a 16% open line of credit for $75,000
 Maintains
a minimum cash balance of $30,000
Schedule of Expected
Cash Collections.
 Borrows
on the first day of the month and repays
loans on the last day of the month
 Pays
a cash dividend of $49,000 in April
 Purchases
$143,700 of equipment in May and
$48,300 in June (both purchases paid in cash)
 Has
an April 1 cash balance of $40,000
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The Cash Budget
The Cash Budget
Schedule of Expected
Cash Disbursements.
Because Royal maintains
a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.
Direct Labor
Budget.
Manufacturing
Overhead Budget.
Selling and Administrative
Expense Budget.
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The Cash Budget
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The Cash Budget
Because Royal maintains
a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.
Ending cash balance for April
is the beginning May balance.
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9-15
The Cash Budget
Quick Check 
What is the excess (deficiency) of cash
available over disbursements for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000
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$50,000 × 16% × 3/12 = $2,000
Borrowings on April 1 and
repayment on June 30.
The Budgeted Income Statement
Cash
Budget
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Learning Objective 4(h)
Budgeted
Income
Statement
Prepare a budgeted
income statement.
With interest expense from the cash
budget, Royal can prepare the budgeted
income statement.
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The Budgeted Income Statement
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Learning Objective 4 (i)
Sales Budget.
Prepare a
budgeted balance
sheet.
Ending Finished
Goods Inventory.
Selling and
Administrative
Expense Budget.
Cash Budget.
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9-16
25% of June
sales of
$300,000.
The Budgeted Balance Sheet
Royal reported the following account
balances prior to preparing its budgeted
financial statements:
11,500 lbs.
at $0.40/lb.
5,000 units
at $4.99 each.
• Land - $50,000
• Common stock - $200,000
• Retained earnings - $146,150 (April 1)
• Equipment - $175,000
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50% of June
purchases
of $56,800.
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Learning Objective 5
Prepare Budget on the
Key Components for
the Service Industry
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Key Budget Components for the Service Industry
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Learning Objective 5 (a)
Wonder World, a hypothetical theme park, has the following data:
Main Sources of
Revenue
• Ticketing
• Food &
Beverages
• Souvenir Shop
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Major
Expenses
•
•
•
•
•
•
•
Salaries
Rent
Cost of Sales
Advertising
Maintenance
Depreciation
Utilities
Prepare a
Visitorship Budget
Departments
•
•
•
•
•
•
Finance & Administration
Operations
Marketing
Souvenir Shop
Food and Beverages
Maintenance
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9-17
Visitorship Budget
Learning Objective 5 (b)
Based on historical records, economic outlook, tourist
arrival expectations, the following visitorship budget for the
coming year is prepared:
Prepare a Revenue
Budget
Number of Visitors
Adults
750,000
Children
250,000
Total Visitors
1,000,000
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Revenue Budget
Revenue Budget
Based on the average price charged by Wonder World and
other historical data, the following revenues per visitor are
budgeted and approved by the top management:
With the budgeted number of visitors and revenues per visitor
from each category, the budgeted revenues are computed:
Revenue
Gate Collections : Adults1
Gate Collections : Children2
Souvenir Shop3
Food and Beverages4
Total Revenue
Revenue per visitor
Gate Collections : Adults
$13
Gate Collections : Children $9
Souvenir Shop
$4
Food and Beverages
$6
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$9,750,000
$2,250,000
$4,000,000
$6,000,000
$22,000,000
Note
1 750,000 X $13
2 250,000 X $9
3 1,000,000 X $4
4 1,000,000 X $6
98
Learning Objective 5 (c)
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Cost of Sales Budget
For the cost of sales on souvenirs and food and beverages,
the company normally makes use of the historical cost of
sales % and takes into account any expected price changes
from suppliers. For the coming year, the expected cost of
sales % is 50% on sales for both the souvenir shop and food
and beverages.
Prepare a Cost of
Sales Budget and
Expense Budget
Cost of Sales
Souvenir Shop
$2,000,000
Food and Beverage $3,000,000
Total
$5,000,000
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9-18
Expenses Budget
How the items are budgeted will depend on the nature of the items.
Nature of expense
Rental
Amount
$1,100,000
5% of revenue as agreed with the landlord.
Salaries
$3,500,000
Zero based approach by reviewing the
actual requirement of each position and its
suitable rate of pay.
Advertising
$1,200,000
$980,000
Proposed by maintenance manager.
Depreciation
$890,000
Computed by the finance manager by
taking into account of existing assets and
proposed new assets.
Utilities
$580,000
Computed by maintenance manager based
on the rates and usage expectations.
$490,000
Based on judgment and any specific
requirements such as legal expenses.
Total
Prepare a
Budgeted Income
Statement
Proposed by marketing manager.
Maintenance
Other operating expenses
Learning Objective 5 (d)
Budget approach
$8,740,000
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Budgeted Income Statement
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Explain the Costs
and Benefits of
Budgeting
Budgeted Income Statement
$22,000,000
Cost of goods sold
$5,000,000
Expenses
$8,740,000
Net income
$8,260,000
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Learning Objective 6
Budgeted Income Statement can be prepared by putting all
previous budgeted information together.
Revenue
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Costs and Benefits of Budgeting
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End of Chapter 10
• Budgeting is time-consuming and costly.
• Budgetary slack or padding is an inherent problem of
budgeting.
• Despite the drawbacks of budgeting, most companies are
still using budgets to plan, communicate, set objectives,
and allocate resources, etc.
• Since budgets are still commonly used, benefits of
budgeting are high, and drawbacks of budgeting can be
minimized by having a good budgeting system.
• For a good budgeting system, it is critical to have effective
communication and mutual trust between the top
management and its staff.
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