• The master budget is an essential management tool that communicates
management’s plans throughout the organization, allocates resources, and
What is a budget?
• A budget is a detailed plan for the future that is usually expressed in formal
• Budgets are used for two distinct purposes
o Planning involves developing goals and preparing various budgets to
achieve those goals.
o Control involves gathering feedback to ensure that the plan is being
properly executed or modified as circumstances change
• Advantages of Budgeting
o Organizations realize many benefits from budgeting, including:
• Budgets communicate management’s plans throughout the
• Budgets force managers to think about and plan for the future. In the
absence of the necessity to prepare a budget, many managers would
spend all of their time dealing with day-to-day emergencies.
• The budgeting process provides a means of allocating resources to
those parts of the organization where they can be used most
• The budgeting process can uncover potential bottlenecks before they
• Budgets coordinate the activities of the entire organization by
integrating the plans of its various parts. Budgeting helps to ensure
that everyone in the organization is pulling in the same direction.
• Budgets define goals and objectives that can serve as benchmarks
for evaluating subsequent performance.
• Responsibility Accounting
o The basic idea underlying responsibility accounting is that a manager
should be held responsible for those items—and only those items—that
the manager can actually control to a significant extent.
• personalizes accounting information by holding individuals
responsible for revenues and costs.
o The point of an effective responsibility accounting system is to make sure
that nothing “falls through the cracks,” that the organization reacts
quickly and appropriately to deviations from its plans, and that the
organization learns from the feedback it gets by comparing budgeted
goals to actual results.
• Choosing a Budget Period o Operating budgets ordinarily cover a one-year period corresponding to
the company’s fiscal year
o A continuous or perpetual budget is a 12-month budget that rolls forward
one month (or quarter) as the current month (or quarter) is completed.
• The Self-Imposed Budget
o A self-imposed budget or participative budget is a budget that is prepared
with the full cooperation and participation of managers at all levels.
o Self-imposed budgets have a number of advantages:
• Individuals at all levels of the organization are recognized as
members of the team whose views and judgments are valued by top
• Budget estimates prepared by front-line managers are often more
accurate and reliable than estimates prepared by top managers who
have less intimate knowledge of markets and day-to-day operations.
• Motivation is generally higher when individuals participate in
setting their own goals than when the goals are imposed from above.
Self-imposed budgets create commitment.
A manager who is not able to meet a budget that has been imposed
from above can always say that the budget was unrealistic and
impossible to meet. With a self-imposed budget, this claim cannot
Two important limitations
• lower-level managers may make suboptimal budgeting
recommendations if they lack the broad strategic perspective
possessed by top managers
• self-imposed budgeting may allow lower-level managers to create
too much budgetary slack.
• Human Factors In Budgeting
the budget should be used as a positive instrument to assist in
establishing goals, measuring operating results, and isolating areas that
The Master Budget: An Overview
• The master budget consists of a number of separate but interdependent
budgets that formally lay out the company’s sales, production, and financial
goals. • The first step in the budgeting process is the preparation of the sales budget,
which is a detailed schedule showing the expected sales for the budget period.
• A cash budget is a detailed plan showing how cash resources will be acquired
o The budgeted income statement provides an estimate of net income for
the budget period and it relies on information from the sales budget,
ending finished goods inventory budget, selling and administrative
expense budget, and the cash budget
• Seeing the Big Picture o a master budget for a manufacturing company is designed to answer 10
key questions as follows:
• How much sales revenue will we earn?
• How much cash will we collect from customers?