1. Chapter 8: The Master Budget
Cost Accounting:
Foundations & Evolutions, 9e
Kinney and Raiborn

2. Learning Objectives
How are strategic planning and tactical planning related to budgeting?
What is the starting point of a master budget, and why?
What are the various components of a master budget and how are they prepared?
Why is the cash budget so important in the master budgeting process?
How and why are budgeted financial statements prepared at the end of the budgeting process?
What benefits are provided by a budget?
(Appendix) How does a budget manual facilitate the budgeting process?

3. Terms
Budgeting—Formalizes plans and translates qualitative narratives into a documented, quantitative format
Budget—Expresses a commitment to planned activities, resource acquisition, and resource use

4. Strategic Planning Long term (5 to 10 years) Top-level management
Long-range goals, strategies, and policies
Foundation for short-term planning
Identify and gather information on key variables—both internal and external

5. Tactical Planning Short term (1 to 18 months)
Top and middle management
Specific objectives and means to achieve strategic plans
Basis against which results can be measured

6. Budgeting
Budget
Short term
Top, middle, and operational management involvement
Usable guidelines to implement strategic and tactical plans
Allocates resources
Standard against which performance can be measured

7. The Master Budget
A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements
For a specific period of time
Static—based on a single level of output demand
Interactive—departments generate and consume information

8. The Master Budget Operating Budgets Financial Budgets Budget
Sales Budget
Cash Budget
Production Budget
Capital Expenditures
Budget
Purchases Budget
Balance Sheet
Direct Labor Budget
Income Statement
Overhead Budget
Statement of Cash Flows
Selling & Administrative Budget
Statement of Retained Earnings

9. Selling and Administration Budget
The Operating Budget
Sales Budget
Selling and Administration Budget
Production Budget
Purchases Budget
Overhead Budget
Direct Labor Budget

10. Sales Forecast Ask sales personnel Extrapolate past trends
Use market research
Employ statistical models and simulation
Sales
Forecast

11. Production Budget Sales estimates Beginning inventory targets
Production manager combines
Sales estimates
Beginning inventory targets
Ending inventory targets
Determines the types, quantities, and timing of products to be manufactured

12. Direct Labor Budget Total number of people Specific types of workers
Production hours needed
Costs
Union contracts
Minimum wage laws
Fringe benefit costs
Payroll taxes

13. Overhead Budget Identify activity base Estimate overhead costs
Separate costs as fixed or variable
Show total costs for operating budgets
Show costs without depreciation for cash budgets

14. Capital Budget Long-term fixed asset needs Payment points Plant
Equipment
Payment points

15. Cash Budget
Highlights the importance of cash for an organization’s continued existence
Translates accrual-based information into cash flows
Indicates effectiveness of credit practices
Allows for planned cash borrowing or investing
Used to prepare pro forma Cash Flow Statement

16. The Financial Budget Statement of Cash Flows Cash Budget
Income Statement/
Cost of Goods
Manufactured
Capital Budget
Operating Budget
Statement of Retained Earnings
Balance Sheet

17. Budgeting Terms Continuous budgeting Budget slack Participatory budget
Imposed budgets
developed by top management
imposed on operating personnel

18. Questions
How are strategic and tactical planning related to budgeting?
What are the various components of a master budget, and how are they prepared?
Why is the cash budget important in the master budgeting process?

19. Potential Ethical Issues
Using a single budget system globally that may conflict with national cultures
Permitting budget slack
Distorting budgeting process by treating short-term conditions as long-term ones
Using fraudulent accounting techniques to meet budget goals
Failure to communicate “big picture” assumptions to all managers participating in the budget process
Promoting “spend-it-or-lose-it” attitudes to punish cost savings and reward spending
Mandating “across-the-board” budget cuts without considering alternative cost reductions
Ignoring employee input in budgeting
Justifying management decisions by using “backwards budgeting”
Disregarding contingencies in budgeting
Ignoring external performance measures and benchmarks