The Master Budget and
Responsibility Accounting
Chapter 22
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1
A budget is a plan that covers a
specific period of time. It helps
management determine how best to
use its resources – both materials
and manpower. Management
estimates future cost and revenues
Objective 1
Learn how to use a budget
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2
Benefits of Budgeting
• Planning
• Coordination and communication
• Benchmarking
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3
Master Budget
• Operating budget - planned revenues and
expenses
• Capital expenditures budget - plan for
purchasing PP&E
• Financial budget - cash budget and
budgeted balance sheet
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4
Master Budget
Operating Budget
Sales Budget
Purchases & Cost of
Goods Sold Budget
The master budget is the financial
Operating
planExpenses
for the entireBudget
organization
The budgets on this slide represent
the operating budget
.
Budgeted Income Statement
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5
Master Budget
Budgeted
Income Statement
Capital
Expenditures
Budget
Cash
Budget
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Budgeted
Balance
Sheet
6
Objective 2
Prepare an operating budget
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7
Sales Budget
• Plan for sales revenues in a future period
• Budgeted sales revenue = sale price per
unit x expected number of units to be sold
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8
E22-8
Waterking
Sales Budget
March
April
Cash sales(80%) $32,000 $40,000
Credit sales(20%)
8,000
10,000
Total sales(100%) $40,000 $50,000
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Total
$90,000
9
Inventory, Purchases, and Cost of
Goods Sold Budget
The only element that is not known or can not be
computed is purchases. Rearrange the equation to
solve for Purchases
Cost of goods sold =
Beginning inventory + Purchases– Ending inventory
Compute
Known
Unknown
Compute
Once you know how much is predicted to be sold, you
Cost ofyougoods
+
can Purchases
plan how much=inventory
need tosold
purchase.
Ending the
inventory–
Remember
equation toBeginning
compute cost inventory
of goods
sold
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10
E22-14
Purchases for first quarter:
Beginning inventory is given = $19,000
Cost of goods sold = Sales x 60% = $60,000
Ending inventory = $20,000 + (10% x (60% x
$150,000) = $29,000
Purchases = Cost of goods sold +
Ending inventory– Beginning inventory
Purchases for first quarter =
$60,000 + 29,000 – 19,000 = $70,000
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11
E22-14
Purchases for second quarter:
Beginning inventory is given = $29,000
Cost of goods sold = Sales x 60% = $90,000
Ending inventory = $20,000 + (10% x (60% x
$125,000) = $27,500
Purchases = Cost of goods sold +
Ending inventory– Beginning inventory
Purchases for second quarter =
$90,000 + 27,500 – 29,000 = $88,500
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12
E22-14
Purchases for third quarter:
Beginning inventory is given = $27,500
Cost of goods sold = Sales x 60% = $75,000
Ending inventory = $20,000 + (10% x (60% x
$200,000) = $32,000
Purchases = Cost of goods sold +
Ending inventory– Beginning inventory
Purchases for third quarter =
$75,000 + 32,000 – 27,500 = $79,500
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13
Inventory, Purchases & Cost of
Goods Sold Budget
Quarter
Cost of goods sold
+Desired ending inventory
=Total required
-Beginning inventory
=Purchases
1
$60,000
29,000
$89,000
19,000
$70,000
2
$90,000
27,500
$117,50
29,000
$88,500
3
$75,000
32,000
$107,000
27,500
$79,500
Total cost of goods sold = $225,000
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14
P22-28B
Total sales
Sales Budget
May
June
$42,900 $43,900
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Total
$86,800
15
P22-28B
Cost of Goods Sold Schedule
Beginning inventory
+Purchases
=Goods available for sale
-Ending inventory
=Cost of goods sold
May
$14,000
21,500
$35,500
20,000
$15,500
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June
$20,000
22,000
$42,000
19,600
$22,400
16
P22-28B
Operating Expense Budget
April
Salary, fixed amount
$4,000
Commission
1,700
Total
$5,700
Rent expense
3,000
Depreciation expense
600
Insurance expense
200
Total
$9,500
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May
$4,000
1,800
$5,800
3,000
600
200
$9,600
17
Budgeted Income Statement
Omaha Office Supply Co.
Budgeted Income Statements
May and June 2008
May
Sales revenue
$42,900
Cost of goods sold*
15,500
Gross profit
$27,400
Operating expenses*
9,500
Operating income
$17,900
June
$43,900
22,400
$21,500
9,600
$11,900
*see separate schedules
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18
Objective 3
Prepare a financial budget
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19
Financial Budget
• Cash budget
• Budgeted balance sheet
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20
Cash Budget
• Cash receipts and cash payments for a
future period
• Cash receipts
– Collections from customers
– Receipts from sale of long-term assets
– Receipts from borrowing
– Receipts from owners
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21
Cash Budget
• Cash payments
– For inventory purchases
– For operating expenses
– Purchase long-term assets
– Payment on loans
– Payment to owners
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22
Cash Collections from Customers –
S22-8
March
$32,000
Cash sales
Collections of last
month’s credit sales
9,000
Total
$41,000
April
Total
$40,000 $72,000
6,400* 15,400
$46,400 $87,400
* March’s sales on account = March sales x 20%
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23
Cash Payments for Purchases –
S22-9
May
Payment of last
month’s purchases
Payment of this
month’s purchases
Total
June
Total
$8,000 $10,000 $18,000
15,000 18,000 33,000
$23,000 $28,000 $51,000
Cash payments for operating expenses are also part
of the cash budget….remember to include only cash
expenses. Depreciation expense is a noncash
expense, so do not include it
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24
Cash Budget
Companies have a desired minimum balance in cash
to keep operations moving smoothly. If cash falls
below the minimum balance, the company will have to
Beginning cash balance
borrow some money
+ Cash receipts
= Cash available
- Cash payments (for inventory, operating
expenses, purchase of long-term assets)
= Ending balance before financing
- Minimum balance
= Excess (deficiency)
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Cash Budget
Financing
Borrow
Principal payments
Interest expense
Total effects of financing
Ending cash balance
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26
E22-17
Cash receipts
Jan
Cash collections from credit
customers
Receipt from note receivable
Total
Feb
$11,000 $15,000
6,000
$17,000 $15,000
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27
E22-17
Cash payments
Purchases of inventory
Operating expenses
Total
Jan
Feb
$13,000 $13,900
3,000
3,000
$16,000 $16,900
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28
E22-17
Jan
Feb
Beginning cash balance
$10,500 $11,500
+ Cash receipts
17,000 15,000
= Cash available
$27,500 $26,500
- Cash payments
16,000 16,900
= Ending balance before financing $11,500 $9,600
- Minimum balance
10,000 10,000
= Excess (deficiency)
$1,500
$(400)
Total effects of financing
1,000
Ending cash balance
$11,500 $10,600
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29
Feb 28
balance
Cash
A/R
11,400
5,150
Sales on
credit
Invent
Equip.
Accum.
Depr
17,720
34,800
(29,870)
E22-19
10,500
28,700
12,200
Cost of
goods sold
12,200
(7,320)
(7,320)
Depreciation
expense
(600)
Operating
expenses
(5,000)
Collections
on account
14,300
Payment for
inventory
(4,600)
Payments on
account
(8,200)
Mar 31
balance
A/P
Owner
Equity
7,900
(600)
(5,000)
(14,300)
4,600
(8,200)
3,050
15,000
34,800
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( 30,470)
2,300
27,980
30
Budgeted Balance Sheet
Oleanders
Budgeted Balance Sheet
March 31, 2008
ASSETS
Current Assets:
Cash
Accounts receivable
Inventory
Plant assets:
Furniture and fixtures
Accumulated depreciation
Total assets
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$ 7,900
3,050
15,000 $25,950
34,800
(30,470)
4,330
$30,280
31
Budgeted Balance Sheet
Oleanders
Budgeted Balance Sheet
March 31, 2008 (continued)
LIABILITIES
Current liabilities:
Accounts payable
$ 2,300
OWNERS' EQUITY
Owners' equity
Total liabilities and owners' equity
27,980
$30,280
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Budgeting and Sensitivity
Analysis
• Helps managers plan for different courses
of action
• Use of technology and budget software
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33
Objective 4
Prepare performance reports for
responsibility centers
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Responsibility Accounting
• System for evaluating performance of
managers and activities they supervise
• Responsibility center - part, segment, or
subunit of an organization whose manager
is accountable for its activities
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Responsibility Center
• Cost center – reports costs only
• Revenue center – reports revenues only
• Profit center - reports revenues, expenses,
and net income or loss
• Investment center - reports revenues,
expenses, income or loss, and investment
used
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36
E22-20
a. Profit center
b. Investment center (or possibly a profit center)
c. Cost center
d. Profit center
e. Cost center
f. Profit center
g. Investment center
h. Revenue center
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Responsibility Accounting
• Performance reports compare budgeted
and actual amounts
• Management by exception – management
technique that focuses on important
differences between budget and actual
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38
E22-21
Web Touch
Responsibility Accounting Performance Report
(Amounts in thousands)
September 2009
Manager – All handheld devices
Budget Actual
Variance
Operating income:
PDAs
Cell Phones
Total operating income
$ 125
474
$ 120
519
$(5)
45
$599
$639
$ 40
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39
E22-21
Assistant Manager – cell
phones
Budget Actual
Variance
Operating income:
Video Cell Phones
$410
$440
$30
Digital Cell Phones
64
79
15
$474
$519
$45
Total operating income
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40
E22-21
Assistant Manager –
DIGITAL CELL PHONES
Budget Actual
Variance
Revenues and
expenses:
Revenues
$204
$214
$10
Expenses
140
135
5
$ 64
$ 79
$15
Operating income
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41
E22-21
• Monica should investigate the
performance of the digital cell phones
operation. Its favorable operating income
variance is significant: 23% ($15/$64) of
budget. Beverly likely would focus her
investigation on how digital cell phones
achieved both higher-than-expected
revenue and lower-than-expected costs
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42
End of Chapter 22
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43