The Master Budget - DomainDLX by yurtgc548

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									    Chapter 7


The Master Budget



                    7-1
Objective 1

Explain the major features
and advantages of a
master budget.



                             7-2
Advantages of Budgets

                   Goals and
Budgets
                   Objectives




                                7-3
Advantages of Budgets


 Compels managers
 to think ahead

                      Aids managers in coordinating
                      their efforts


            Provides definite expectations that are the
            best framework to evaluate performance

                                                 7-4
Types of Budgets

Strategic Plan         Long-Range Plan


Capital Budget          Master Budget


          Continuous Budget
                                        7-5
    Strategic Plan
   The most forward-looking budget is the
    strategic plan, which sets the overall goals
    and objectives of the organization.




                                                   7-6
    Long-Range Plan
   The strategic plan leads to long-range
    planning, which produces forecasted
    financial statements for five- to ten-year
    periods.




                                                 7-7
Capital Budget

Long-range plans…
are coordinated with capital budgets,
which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.




                                           7-8
   Master Budget…

                     Sales

summarizes the       Production
planned activities
of all subunits of   Distribution
an organization.
                     Finance

                                    7-9
Master Budget


 Operating Budget



                    Financial Budget



                                       7 - 10
Objective 2

Follow the principal steps in
preparing a master budget.




                                7 - 11
 Master Budget

Sales Budget


Master Budget


Purchases       Schedules   Costs


                                    7 - 12
      Components of Master Budget
Inventory
Budget
____ ____
____ ____
____ ____
____ ____
____ ____

Sales       Purchases      Cost of         Operating   Budgeted
Budget      Budget         Goods Sold      Expenses    Income
____ ____   ____ ____      Budget          Budget      Statement
____ ____   ____ ____      ____ ____       ____ ____   ____ ____
____ ____   ____ ____      ____ ____       ____ ____   ____ ____
____ ____   ____ ____      ____ ____       ____ ____   ____ ____
____ ____   ____ ____      ____ ____       ____ ____   ____ ____


                        Operating Budget
                                                          7 - 13
Components of Master Budget
              Cash
              Budget
              _____   _____
              _____   _____
Capital       _____   _____
Budget        _____   _____
_____ _____   _____   _____
_____ _____                   Financial
_____ _____
_____ _____                   Budget
_____ _____   Budgeted
              Balance
              Sheet
              _____ _____
              _____ _____
              _____ _____
              _____ _____
              _____ _____

                                          7 - 14
Objective 3

Prepare the operating budget
and the supporting schedules.




                            7 - 15
    Operating Budget
                            Cash collections
Sales Budget                from customers

                            Disbursements
Purchases Budget            for purchases

                            Disbursements
Operating Expenses Budget   for operating
                            expenses

                                       7 - 16
    Cash Collections
 It is easiest to prepare budgeted cash
  collections at the same time as the sales
  budget.
 Cash collections include the current
  month’s cash sales plus the previous
  month’s credit sales.



                                              7 - 17
  Purchases Budget



Budgeted purchases = Desired ending inventory
+ Cost of goods sold – Beginning inventory




                                          7 - 18
    Disbursements for Purchases
 For example, 50% of the current month’s
  purchases and 50% of the previous month’s
  purchases may be included.
 The total disbursements are then used in
  preparing the cash budget.




                                          7 - 19
    Operating Expense Budget
 The budgeting of operating expenses
  depends on several factors.
 Month-to-month changes in sales volume
  and other cost-driver activities directly
  influence many operating expenses.




                                              7 - 20
    Operating Expense Budget
   Expenses driven by sales volume include
    sales commissions and many delivery
    expenses.




                                              7 - 21
    Operating Expense Budget
   Other expenses are not influenced by sales
    or other cost-driver activity and are
    regarded as fixed, within appropriate
    relevant ranges.

           Rent               Depreciation

        Insurance                Salaries

                                                 7 - 22
    Operating Expense
    Disbursements
   Disbursements for
    operating expenses
    are based on the
    operating expense
    budget.




                         7 - 23
    Operating Expense
    Disbursements
 For example, 50% of last month’s and this
  month’s wages and commissions plus
  miscellaneous and rent expenses may be
  included.
 The total of these disbursements is then
  used in preparing the cash budget.



                                              7 - 24
Budgeted Income Statement



The income statement will be complete
after addition of the interest expense,
which is computed after the cash budget
has been prepared.



                                          7 - 25
Budgeted Income Statement



Budgeted income from operations
is often a benchmark for judging
management performance.



                                   7 - 26
Objective 4

Prepare the financial budget.




                            7 - 27
    Cash Budget

The cash budget has the following major sections:
– total cash available before financing
– cash disbursements
– minimum cash balance desired
– financing requirements
– ending cash balance




                                             7 - 28
  Cash Budget

Total cash available before financing =
Beginning cash balance + Cash receipts


Cash receipts depend on collections from
customers’ accounts receivable and cash sales
and on other operating income sources.

                                           7 - 29
  Cash Budget

Cash disbursements for purchases depend on
the credit terms extended by suppliers and the
bill-paying habits of the buyer.


Payroll depends on wages, salaries,
commission terms, and payroll dates.


                                            7 - 30
  Cash Budget

Disbursements for some costs and expenses
depend on contractual terms for installment
payments, mortgage payments, rents, leases,
and miscellaneous items.

Other disbursements include outlays for
fixed assets, long-term investments,
dividends, and the like.
                                              7 - 31
  Cash Budget


Management determines the minimum
cash balance desired depending on the
nature of the business and credit arrangements.




                                             7 - 32
Cash Budget

Financing requirements depend on how
the total cash available compares with
the total cash needed.

Needs include the disbursements plus
the desired ending cash balance.



                                         7 - 33
  Cash Budget


Ending cash balance
= Total cash available before financing
– Total disbursements + Cash from financing


The cash from financing can be either
positive (borrowing) or negative (repayment).

                                           7 - 34
   Budgeted Balance Sheet


The final step in preparing the master budget
is to construct the budgeted balance sheet
that projects each balance sheet item in
accordance with the business plan as
expressed in the previous schedules.



                                                7 - 35
Objective 5

Understand the difficulties
of sales forecasting.




                              7 - 36
    Sales Forecast
   A sales forecast is a prediction of sales
    under a given set of conditions.




                                                7 - 37
    Factors to Consider When
    Forecasting Sales
1   Past patterns of sales
2   Estimates made by the sales force
3   General economic conditions
4   Competitors’ actions




                                        7 - 38
    Factors to Consider When
    Forecasting Sales
5   Changes in the firm’s prices
6   Changes in product mix
7   Market research studies
8   Advertising and sales promotion plans




                                            7 - 39
Objective 6

Anticipate possible human
relations problems caused
by budgets.



                            7 - 40
    Acceptance of the Budget
 To fully benefit from budgets, an
  organization needs the support of all the
  firm’s employees.
 To avoid negative attitudes toward budgets,
  accountants and top management must
  demonstrate how budgets can help each
  manager and employee achieve better
  results.

                                            7 - 41
  Acceptance of the Budget


Another problem that can negate the benefits
of budgeting arises if budgets stress one set
of performance goals, but employees and
managers are rewarded for different
performance measures.



                                            7 - 42
    Participative Budgeting
 Budgets created with the active
  participation of all affected employees are
  generally more effective than budgets
  imposed on subordinates.
 This involvement is usually called
  participative budgeting.



                                                7 - 43
Objective 7

Use a spreadsheet to develop
a budget.




                               7 - 44
  Software

Spreadsheet software for personal computers
is a powerful and flexible tool for budgeting.

Sensitivity analysis is the systematic varying
of budget data input to determine the effects
of each change on the budget.


                                             7 - 45
Objective 8

Understand the importance
of budgeting to managers.




                            7 - 46
   Importance of Budgets
   to Managers



The budgetary process compels managers to
think and to prepare for changing conditions.




                                                7 - 47
     Importance of Budgets
     to Managers



Budgets are aids in planning, communicating, setting
standards of performance, motivating personnel
toward goals, measuring results, and directing
attention to problem areas that need investigation.


                                               7 - 48
End of Chapter 7




                   7 - 49

								
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