Budgeting
Master Budget and Responsibility Budgeting
Accounting
h the most widely used accounting tool for
planning and controlling organizations.
Chapter 6 A budget is the
- quantitative expression of a proposed plan of
action
- for a future time period and
- an aid to the coordination and implementation of
the plan.
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Master Budget? The Master Budget
h a comprehensive expression of management’s
operating and financial plans for a future time period v embraces the impact of both operating decisions
(usually one year). and financing decisions.
h is also summarized in a set of budgeted v Operating decisions
financial statements. center on the use of scarce resources.
v Financing decisions
Pro forma statements center on how to obtain the funds to acquire those
Term used for budgeted financial statements resources.
Income Statement, Balance Sheet and Cash Flow
Statement
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Scarce resources Why Budgets?
Two Products X1 X2 v it gives senior management something to do with
Selling Price $12.00 $21.00 all their free time.
v it allows the company to make decisions by the
Variable Costs $8.00 $18.00
seat of its pants.
Contribution margin $4.00 $3.00
v it causes disruptions because production is
uninformed regarding the sales plans of the company
Machine time (minutes) 10 6
If the firm has scarce machine capacity, which
product should be made ? M D M
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Budgeting
Why Budgets? Performance measures
Choices:
Budgets Past performance or
Budgets.
v compel planning, including the implementation Budgeted performance measures can overcome
of plans. three key limitations of using past performance:
v provide performance criteria. v Past results incorporate past miscues and sub-
v promote coordination and communication within standard performance.
the organization v The future may be expected to be very different
from the past.
v Managers playing games - ratcheting
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Budgets - Coordination 1. Operating budget
v Coordination is the meshing and balancing of all Revenue/Sales budget - Units to be sold
factors of production or service and of all the Production budget in units - Units to be produced
departments and business functions so that the Direct materials purchase budget
company can meet its objectives.
Direct labor budget
v Communication is getting those objectives
understood and accepted by all the employees in Indirect Costs budget
the various departments and functions. Cost of goods sold budget
Nonmanufacturing costs budget
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2. Financial Budget Budgets – Strategy and Plans
v Budgeting is most useful when done as an
Budgeted Income Statement integral part of an organization’s strategy
Financial budget analysis.
Capital budget v Strategy describes how an organization
Cash budget matches its own capabilities with the
Budgeted balance sheet opportunities in the market place to accomplish
its overall objectives.
Budgeted statement of cash flows
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Budgeting
Budgeting Cycle Time Coverage of Budgets
v Planning the performance of the organization v Budgets typically have a set time period (month,
v Providing a frame of reference, a set of specific quarter, year).
expectations against which actual results can be v This time period can itself be broken into sub-
compared periods.
v Investigating variations from plans v The most frequently used budget period is one
v Correcting action follows, if necessary year.
v Planning again v Businesses are increasingly using rolling budgets.
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Operating Budget Responsibility Accounting
v The foundation of the operating budget is the It is a system for evaluating the performance of
revenue or sales budget. managers based on activities under their supervision.
v The operating budget ends with the budgeted What is a Responsibility Center?
income statement. It is any part, segment, or subunit of a business that
needs control.
Could be Production, Sales or Service centers
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Types of Responsibility Centers Feedback and Filing Blame
Cost center reports Budgets coupled with responsibility accounting
only costs provide systematic help for managers, particularly if
Revenue center reports managers interpret the feedback carefully.
only revenues.
Variance =
Profit center reports
net income or net loss. Actual results – Budgeted figures
Investment center reports
income or loss and the investment used by the How should managers use variances?
center.
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Budgeting
What is Controllability?
It is the degree of influence that a specific manager
has over costs, revenues, or other items in question.
A controllable cost is any cost that is primarily subject
to the influence of a given responsibility center
manager for a given time period.
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