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2005 Prentice Hall Business Publishing, 2005 Prentice Hall Business Publishing, Introduction to Management Accounting Introduction to Management
t Accounting 13/e, 13/e, Horngren/Sundem/Stratton Horngren/Sundem/Stratton 7 7 - - 1 1

100 N88l0f 8000l 100 N88l0f 8000l
Chapter 7 Chapter 7
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7 - 2
-00ll90 1 -00ll90 1
pIain the major features pIain the major features
and advantages of a and advantages of a
master budget. master budget.
098l808 0l 8000l8 098l808 0l 8000l8
Budgets Budgets
Goals and Goals and
objectives objectives
A budget allows systematic rather A budget allows systematic rather
than chaotic reaction to change. than chaotic reaction to change.
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Provides definite Provides definite
expectations that expectations that
are the best framework are the best framework
to evaluate performance to evaluate performance
Aids managers in Aids managers in
coordinating their efforts coordinating their efforts
Compels Compels
managers managers
to think to think
ahead ahead
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Strategic plan Strategic plan Long Long- -range plan range plan
Capital budget Capital budget Master budget Master budget
Continuous budget Continuous budget
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%he most forward %he most forward- -looking budget is the looking budget is the
strategic plan, which sets the overall strategic plan, which sets the overall
goals and objectives of the organization. goals and objectives of the organization.
0 0 880 Fl8 880 Fl8
%he strategic plan leads to long %he strategic plan leads to long- -range range
planning, which produces planning, which produces
forecasted financial statements forecasted financial statements
for five for five- - to ten to ten- -year periods. year periods.
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Long Long- -range plans. range plans.
are coordinated with capital budgets, are coordinated with capital budgets,
which detail the planned expenditures which detail the planned expenditures
for facilities, equipment, new products, for facilities, equipment, new products,
and other long and other long- -term investments. term investments.
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Sales Sales
Production Production
Distribution Distribution
Finance Finance
%he master budget %he master budget
summarizes the summarizes the
planned activities planned activities
of all subunits of of all subunits of
an organization. an organization.
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#olling budgets... #olling budgets...
are a common form of are a common form of
master budgets that master budgets that
add a month in the add a month in the
future as the month future as the month
just ended is dropped. just ended is dropped.
Operating budget Operating budget
Financial budget Financial budget
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oIIow the principaI steps in oIIow the principaI steps in
preparing a master budget. preparing a master budget.
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1. Basic data 1. Basic data
a. a. Sales budget Sales budget
b. b. Cash collections from customers Cash collections from customers
c. c. Purchases budget Purchases budget
d. d. Disbursements for purchases Disbursements for purchases
e. e. Operating expense budget Operating expense budget
f. f. Disbursements for operating expenses Disbursements for operating expenses
%he principal steps in preparing %he principal steps in preparing
the master budget are: the master budget are:
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1. Basic data 1. Basic data
2. Operating budget 2. Operating budget
3. Financial budget 3. Financial budget
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!repare the operating budget !repare the operating budget
and the supporting scheduIes. and the supporting scheduIes.
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Sales Sales
budget budget
Cash collections Cash collections
from customers from customers
Disbursements Disbursements
for purchases for purchases
Disbursements for Disbursements for
operating expenses operating expenses
Purchases Purchases
budget budget
Operating expenses Operating expenses
budget budget
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t is easiest to prepare budgeted t is easiest to prepare budgeted
cash collections at the same cash collections at the same
time as the sales budget. time as the sales budget.
Cash collections include the current Cash collections include the current
month's cash sales plus the month's cash sales plus the
previous month's credit sales. previous month's credit sales.
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Budgeted purchases Budgeted purchases
= Desired ending inventory = Desired ending inventory
+ Cost of goods sold + Cost of goods sold
Beginning inventory Beginning inventory
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For example, 50% of the current month's For example, 50% of the current month's
purchases and 50% of the previous purchases and 50% of the previous
month's purchases may be included. month's purchases may be included.
%he total disbursements are then %he total disbursements are then
used in preparing the cash budget. used in preparing the cash budget.
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%he budgeting of operating expenses %he budgeting of operating expenses
depends on several factors. depends on several factors.
Month Month- -to to- -month changes in sales month changes in sales
volume and other cost volume and other cost- -driver activities driver activities
directly influence many operating expenses. directly influence many operating expenses.
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xpenses driven by sales volume xpenses driven by sales volume
include sales commissions include sales commissions
and many delivery expenses. and many delivery expenses.
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Other expenses are not influenced by sales Other expenses are not influenced by sales
or other cost or other cost- -driver activity and are regarded driver activity and are regarded
as fixed, within appropriate relevant ranges. as fixed, within appropriate relevant ranges.
#ent #ent
nsurance nsurance
Depreciation Depreciation
Salaries Salaries
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l8-0f80M0l8 l8-0f80M0l8
Disbursements for operating expenses are Disbursements for operating expenses are
based on the operating expense budget. based on the operating expense budget.
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For example, 50% of last month's For example, 50% of last month's
and this month's wages and and this month's wages and
commissions plus miscellaneous commissions plus miscellaneous
and rent expenses may be included. and rent expenses may be included.
%he total of these disbursements is then %he total of these disbursements is then
used in preparing the cash budget. used in preparing the cash budget.
8000l00 l00M0 $l8l0M0l 8000l00 l00M0 $l8l0M0l
%he income statement will be complete %he income statement will be complete
after addition of the interest expense, after addition of the interest expense,
which is computed after the cash which is computed after the cash
budget has been prepared. budget has been prepared.
Budgeted income from operations Budgeted income from operations
is often a benchmark for judging is often a benchmark for judging
management performance. management performance.
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!repare the financiaI budget. !repare the financiaI budget.
880 8000l 880 8000l
%he cash budget has the following major sections: %he cash budget has the following major sections:
available cash balance available cash balance
cash receipts disbursements cash receipts disbursements
cash needed from (or used for) financing cash needed from (or used for) financing
ending cash balance ending cash balance
880 8000l 880 8000l
Available cash balance Available cash balance
= Beginning cash balance = Beginning cash balance
Minimum cash balance desired. Minimum cash balance desired.
Cash receipts depend on collections from Cash receipts depend on collections from
customers' accounts receivable, cash sales, customers' accounts receivable, cash sales,
and on other operating income sources. and on other operating income sources.
880 8000l 880 8000l
Cash disbursements for purchases depend Cash disbursements for purchases depend
on the credit terms extended by suppliers on the credit terms extended by suppliers
and the bill and the bill- -paying habits of the buyer. paying habits of the buyer.
Payroll depends on wage, salary, and Payroll depends on wage, salary, and
commission terms and on payroll dates. commission terms and on payroll dates.
880 8000l 880 8000l
Other disbursements include outlays for Other disbursements include outlays for
fixed assets, long fixed assets, long- -term investments, term investments,
dividends, and the like. dividends, and the like.
Disbursements for some costs and expenses Disbursements for some costs and expenses
depend on contractual terms for installment depend on contractual terms for installment
payments, mortgage payments, rents, payments, mortgage payments, rents,
leases, and miscellaneous items. leases, and miscellaneous items.
880 8000l 880 8000l
Management determines the minimum Management determines the minimum
cash balance desired depending cash balance desired depending
on the nature of the business on the nature of the business
and credit arrangements. and credit arrangements.
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Financing requirements depend on how Financing requirements depend on how
the total cash available compares the total cash available compares
with the total cash needed. with the total cash needed.
Needs include the disbursements plus Needs include the disbursements plus
the desired ending cash balance. the desired ending cash balance.
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nding cash balance nding cash balance
= Beginning cash balance = Beginning cash balance
+ #eceipts + #eceipts Disbursements Disbursements
+ Cash from financing + Cash from financing
%he cash from financing can be %he cash from financing can be
either positive (borrowing) either positive (borrowing)
or negative (repayment). or negative (repayment).
8000l00 88l800 $000l 8000l00 88l800 $000l
%he final step in preparing the master budget %he final step in preparing the master budget
is to construct the budgeted balance sheet is to construct the budgeted balance sheet
that projects each balance sheet item in that projects each balance sheet item in
accordance with the business plan. accordance with the business plan.
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pIain the difficuIties pIain the difficuIties
of saIes forecasting. of saIes forecasting.
$8l08 f0f0088l $8l08 f0f0088l
A sales forecast is a prediction of sales A sales forecast is a prediction of sales
under a given set of conditions. under a given set of conditions.
Sales forecasts are usually prepared under Sales forecasts are usually prepared under
the direction of the top sales executive. the direction of the top sales executive.
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f0f0088ll $8l08 f0f0088ll $8l08
Competitors' actions Competitors' actions
Past patterns of sales Past patterns of sales
stimates made by the sales force stimates made by the sales force
General economic conditions General economic conditions
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f0f0088ll $8l08 f0f0088ll $8l08
Advertising and sales promotion plans Advertising and sales promotion plans
Changes in the firm's prices Changes in the firm's prices
Changes in product mix Changes in product mix
Market research studies Market research studies
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nticipate possibIe human nticipate possibIe human
reIations probIems caused reIations probIems caused
by budgets. by budgets.
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l00 8000l l00 8000l
%o fully benefit from budgets, an %o fully benefit from budgets, an
organization needs the support organization needs the support
of all the firm's employees. of all the firm's employees.
%he attitude of top management will %he attitude of top management will
heavily influence lower heavily influence lower- -level level
workers' and managers' attitudes. workers' and managers' attitudes.
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l00 8000l l00 8000l
Another problem that can negate the benefits Another problem that can negate the benefits
of budgeting arises if budgets stress one set of budgeting arises if budgets stress one set
of performance goals, but employees and of performance goals, but employees and
managers are rewarded for different managers are rewarded for different
performance measures. performance measures.
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Budgets created with the active participation Budgets created with the active participation
of all affected employees are generally more of all affected employees are generally more
effective than budgets imposed on subordinates. effective than budgets imposed on subordinates.
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%he budgeting focus is on preparing %he budgeting focus is on preparing
budgets for various functions budgets for various functions
such as production, selling, such as production, selling,
and administrative support. and administrative support.
0ll9ll 0ll9ll 88800 N88l0f 8000l8 88800 N88l0f 8000l8
%his budgetary system emphasizes %his budgetary system emphasizes
the planning and control purpose the planning and control purpose
of cost management. of cost management.
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&se a spreadsheet to &se a spreadsheet to
deveIop a budget. deveIop a budget.
(ppendi 7) (ppendi 7)
$f0808000l8 $f0808000l8
Spreadsheet software for personal computers Spreadsheet software for personal computers
is a powerful and flexible tool for budgeting. is a powerful and flexible tool for budgeting.
Arithmetic errors are virtually nonexistent. Arithmetic errors are virtually nonexistent.
Spreadsheets can be used to make a Spreadsheets can be used to make a
mathematical model of the organization. mathematical model of the organization.
2005 Prentice Hall Business Publishing, 2005 Prentice Hall Business Publishing, Introduction to Management Accounting Introduction to Management Accounting 13/e, 13/e, Horngren/Sundem/Stratton Horngren/Sundem/Stratton 7 7 - - 47 47
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2005 Prentice Hall Business Publishing, 2005 Prentice Hall Business Publishing, Introduction to Management Accounting Introduction to Management

t Accounting 13/e, 13/e, Horngren/Sundem/Stratton Horngren/Sundem/Stratton 7 7 - - 1 1

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