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Chapter 7
Introduction to Budgets
and Preparing the Master Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 1
Learning
Objective 1 Budgets and the Organization
Goals and
Budgets
objectives
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 2
Benefits of Budgets
Compel
managers
to think
ahead Provide an opportunity to
reevaluate existing activities
and evaluate new ones.
Management
Managementshould
shouldseek
seekto
tocreate
create
an
anenvironment
environmentwhere
wherethere
thereisisaa
true
truetwo-way
two-wayflow
flowof
ofinformation.
information.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 4
Potential Problems in Implementing Budgets
Message conveyed by
the budget system may
be misaligned with
incentives provided by
the compensation
system.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 5
Learning
Objective 3 Incentives to Lie and Cheat
Dysfunctional
incentives lead
managers to make
poor decisions.
Lying can arise if the
budget process creates
incentives to bias the
budget information.
Budgetary Slack (budget padding) is the
overstatement or understatement of budgeted
revenue to create a goal that is easier to achieve.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 6
Learning
Objective 4 Sales Forecasting
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 7
Factors to Consider When Forecasting Sales
Es
t l
By imat a
er mi c n s
Pas sal es m n
t pa e s ad Ge ono itio t or s’
of tter
sal ns
for e
ce ec ond pe ti s
es c Comaction
r k et Cha
a n
M a r ch f i r m ge s i n
rese dies ’ s p t he
stu n g Ch
rice
s
i
is es ans pro an
r t
dve sal n pl du ges
A and tio c t in
mi
m o x
pro
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 8
Learning
Objective 5 Types of Budgets
Master budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 9
Strategic Plan
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 10
Long-range Plans
Long-range plans…
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 11
Master Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 12
Continuous Budget
Rolling budgets...
are a common form of
master budgets that
add a month in the
future as the month
just ended is dropped.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 13
Master Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 14
Learning
Objective 6 Steps in Preparing the Master Budget
1. Basic data
2. Operating budget
3. Financial budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 15
Steps in Preparing the Master Budget
1. Basic data
a. Sales budget
b. Cash collections from customers
c. Purchases and cost-of-goods sold budget
d. Cash disbursements for purchases
e. Operating expense budget
f. Cash disbursements for operating expenses
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 16
Steps in Preparing the Master Budget
Operating Budget
2. Prepare budgeted income statement using basic data in step 1.
Financial Budget
3. Prepare forecasted financial statements:
b. Capital budget
c. Cash budget
d. Budgeted Balance sheet
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 17
Learning
Objective 7 Operating Budget
Purchases Disbursements
budget for purchases
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 18
Cash Collections
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 19
Purchases Budget and Cash Disbursements
Budgeted purchases
= Desired ending inventory
+ Cost of goods sold
– Beginning inventory
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 20
Operating Expense Budget
Expenses driven by
sales volume include
sales commissions and
many delivery expenses.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 21
Operating Expense Budget
Rent Depreciation
Insurance
Salaries
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 22
Operating Expense Disbursements
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 23
Budgeted Income Statement
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 24
Learning
Objective 8 Financial Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 25
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 26
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 27
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 28
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 29
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 30
Cash Budget
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 31
Budgeted Balance Sheet
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 32
Activity-Based Master Budgets
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 33
Financial Planning Models
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 34
Learning
Objective 9 Spreadsheets for Budgeting
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 35
The End
End of Chapter 7
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 7 - 36