ACC 220 Lecture Notes - Lecture 8: Controllability, Income Statement, Job Enrichment
CHAPTER NINE - THE MASTER BUDGET
Descriptions of Budgeting
●All businesses and people should prepare budgets
●Budgets help business owners and managers to plan ahead, and later, exercise control by
comparing what actually happened to what was expected in the budget
●Budget formalize managers’ expectations regarding sales, prices, and costs
●Even small businesses and nonprofit entities can benefit from the planning and control
provided by budgets
Budgeting and Planning and Control
●Planning and control are linked
●Planning is looking ahead to see what actions should be taken to realize particular goals
●Control is looking backward, determining what actually happened and comparing it with the
previously planned outcomes
●Budgets are financial plans for the future and are a key component of planning. They
identify objectives and the actions needed to achieve them
●Before preparing a budget, an organization should develop a strategic plan
●The strategic plan plots a direction for an organization’s future activities and operations; it
generally covers at least 5 years.
Advantages of Budgeting
●A budgetary system gives an organization several advantages
○Planning - Budgeting forces management to plan for future
○Information for decision making - Budget improves decision making, ^ happy
customers ^ wages for workers
○Standards for performance evaluation - Control is comparing actual results w/
budgeted results
○Improved communication & coordination - Budgets also serve to communicate and
coordinate the plans of the organization to each employee; the role of
communication and coordination becomes even more important as an organization
grows.
The Master Budget
●The comprehensive financial plan for the org. As a whole
●Typically, for a 1-year period, corresponding to the fiscal year of the company
●Yearly budgets are broken down into quarterly and monthly budgets
●The use of smaller time periods allows managers to compare actual data with budgeted data
more frequently, so problems may be noticed and resolved sooner.
●Some organizations have developed a continuous budgeting philosophy
●A continuous budget is a moving 12 month budget
●As a month expires in the budget, an additional month in the future is added so that the
company always has a 12-month plan on hand
●Proponents of continuous budgeting maintain that it forces managers to plan ahead
constantly.
Master Budget: Directing and Coordinating
●Most organizations prepare the master budget for the coming year during the last 4 or 5
months of the current year
●The budget committee:
○Reviews the budget
○Provides policy guidelines and budgetary goals
○Resolves differences that arise as the budget is prepared
○Approves the final budget
○Monitors the actual performance of the organization as the year unfolds
●The controller usually serves as the budget director, the person responsible for directing
and coordinating the organization’s overall budgeting process
Master Budget: Major Components
●Can be divided into operating and financial budgets
○Operating budgets describe the in•income-generating activities of a firm: sales,
production, and finished goods inventories. Outcome is a pro forma or budgeted
income statement
○Financial budgets detail the inflows and outflows of cash and the overall financial
position
■Planned cash inflows and outflows appear in the cash budget. The expected
financial position at the end of the budget period is shown in a budgeted, or
pro forma, balance sheet
●Since many of the financing activities are not known until the operating budgets are known,
the operating budget is prepared first.
Preparing the Operating Budget
●The operating budget consists of a budgeted income statement accompanied by the
following supporting schedules in this order:
○Sales budget
○Production budget
○Direct materials purchases budget
○Direct labor budget
○Overhead budget
Document Summary
All businesses and people should prepare budgets. Budgets help business owners and managers to plan ahead, and later, exercise control by comparing what actually happened to what was expected in the budget. Budget formalize managers" expectations regarding sales, prices, and costs. Even small businesses and nonprofit entities can benefit from the planning and control provided by budgets. Budgeting and planning and control previously planned outcomes. Planning is looking ahead to see what actions should be taken to realize particular goals. Control is looking backward, determining what actually happened and comparing it with the. Budgets are financial plans for the future and are a key component of planning. Before preparing a budget, an organization should develop a strategic plan. The strategic plan plots a direction for an organization"s future activities and operations; it identify objectives and the actions needed to achieve them generally covers at least 5 years. A budgetary system gives an organization several advantages.
