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PROJECT REPORT

ON
MASTER BUDGET.
MASTER OF COMMERCE
ACCOUNTANCY
PART I (SEMESTER-I)
(2015-2016)
INTERNAL ASSESSMENT
ADVANCE COST ACCOUNTING
SUBMITTED BY:NIMESH MAHIDA

ROLL NO:-29
K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE
VIDYAVIHAR (EAST)

AFFILIATED TO UNIVERSITY OF MUMBAI

K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE


VIDYAVIHAR (EAST)

CERTIFICATE
(2015-2016).
This is to certify that the project entitled MASTER BUDGET is a
project work done by MASTER NIMESH MAHIDA, ROLL NO:-29

in

fulfillment of the requirements for the MCOM in ACCOUNTANCY (PART-I)


(SEMESTER-I) during the academic year 2015-2016 is the original work done
of the candidate and completed under guidance of CA KINJAL JOTA

Date: Place: - MUMBAI

..

..

Internal Examiner

External Examiner

(Mrs. Sonali Deogirikar)

(Dr. SUDHA VYAS)

MCOM Coordinator

Principal

DECLARATION BY STUDENT

I, NIMESH MAHIDA, ROLL NO:-29, the student of MCOM in


ACCOUNTANCY (Part-I) (SEMESTER-I) (2015-2016) hereby declares that I
have completed the project on MASTER BUDGET under the supervision of
the internal guidance of CA. KINJAL JOTA.

The information submitted is true and original to best of my knowledge.

Thank you,
Yours faithfully,
NIMESH MAHIDA
ROLL NO:-29

ACKNOWLEDGEMENT
I would like to thank all the people who helped me in undertaking the study and
completing the project, by imparting me with valuable information and guidance
that was required at every stage of my project work.
I would like to thank our principal, Dr. SUDHA VYAS and MCOM
Co-ordinate, for giving me an opportunity and encouragement to prepare the
project.
Last but not the least, I would like to thanks my project guide CA
KINJAL JOTA for guiding and helping me throughout the preparation of my
project, right from selection of the topic till its completion.

NIMESH MAHIDA
ROLL NO:-29

DEFINATION OF MASTER BUDGET:The master budget is the aggregation of all lower-level budgets produced by a
company's various functional areas, and also includes budgeted financial
statements, a cash forecast, and a financing plan.
The master budget is typically presented in either a monthly or quarterly format,
or usually covers a company's entire fiscal year. An explanatory text may be
included with the master budget, which explains the company's strategic
direction, how the master budget will assist in accomplishing specific goals, and
the management actions needed to achieve the budget.
There may also be a discussion of the headcount changes that are required to
achieve the budget.
A master budget is the central planning tool that a management team uses to
direct the activities of a corporation, as well as to judge the performance of its
various responsibility centers.
It is customary for the senior management team to review a number of iterations
of the master budget and incorporate modifications until it arrives at a budget that
allocates funds to achieve the desired results.
Hopefully, a company uses participative budgeting to arrive at this final budget,
but it may also be imposed on the organization by senior management, with little
input from other employees.
For instance, every company has a group of employees in charge of the
administrative duties within the company. If a company was purchased, there
would no need to keep two sets of administrative staff.
The management of the acquiring company would have to make a decision that
should be let go. Management can also use the master budget for expansion
planning. For instance, a machine shop should consider current cash flows,
current loan rates, current debt limits, and future expected sales before
management plans a large expansion.
The master budget is the primary financial planning mechanism for an
organization and also provides the foundation for a traditional financial control
system. More specifically, it is a comprehensive integrated financial plan
developed for a specific period of time, e.g., for a month, quarter, or year.
This is a much broader concept than the first three types of budgeting.
The master budget includes many appropriation budgets (typically in the
administrative and service areas) as well as flexible budgets, a capital budget and
much more.

FUNCTIONS OF MASTER BUDGET:


SUM OFALL WHOLES:-

A master budget must add all the budgets together to get one bottom line. This
master budget, in turn, is used to determine the overall revenue and expenses of
an organization and its profitability. This helps the higher-ups know exactly how
much they are spending on running the business.
DIVISIONS:-

A master budget must also list all separate budgets. Just having one big total is
not enough. A master budget must also list each departments budget for the year.
This way, the company can know what divisions are profitable and what
divisions are under- performing. Basically, this is a way to keep track of spending
on a more micro-level.
HISTORY:-

A master budget must keep a thorough history. On an even smaller scale, the
master budget must keep track of all major spending in each division. That way,
the company is able to determine how resources are being spent. The master
budget must keep track of production costs, sales costs and maintenance costs
past, future and projected.
CONCISE:-

A master budget must be comprehensible and concise. The master budget has to
be an all-inclusive, one-stop listing of the businesss expenses and revenue in
general. It does not have to keep track of the smaller expenditures, but it should
delegate capital for the larger necessities to make the business run like salaries,
taxes and property payment.
BUDGET INTERDEPENDENCY:-

The master budget's outline of the interdependency of sub-budgets allows


company management to see how the actions of different departments feed
throughout the organization. This flowchart of budget flow can help management
control the organization by being able to see how non-optimal move throughout
the rest of the organization results.
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DEPARTMENTAL CONTROL:-

Breaking the master budget into sub-budgets gives full responsibility for
departmental budgets over to the appropriate departments. The idea of
responsibility accounting -- which asserts that individuals should only be held
accountable for results that they can control -- allows managers to control
employees that feel reasonable for their actions. According to the textbook
"Managerial accounting," this could lead to increased productivity.
BUDGETED FINANCIAL STATEMENT:-

The final output of the master budget is a set of budgeted financial statements.
Because the output of the master budgeting process is a report that is familiar to
top management, company decision-makers can determine how the company's
financials would look if the budget objectives were attained. Company control
and processes can then be changed and updated to ensure that financial objectives
are achieved.
SALES AWARENESS:-

The master budget begins with sales forecasts, which reinforces the idea that
without customers a business will have a difficult time succeeding, regardless of
what happens down the production line. For employees that are far removed from
the sales function, this is a relevant reminder of how customers affect the
business.
SECTIONS:-

The master budget is broken down in terms of the departments, so the reader can
look at specific departments for financial information, if required. Under each
department, there will be common headings, such as operational budgets,
production fees, total sales or earnings for the department, cash flow statements
and income statements for the department and a full balance sheet that presents
the department's earnings and spending for a given period.

A diagram illustrating the various parts of a master budget is presented in Exhibit


9-4.

The master budget has two major parts including the operating budget and the
financial budget (See Exhibit 9-4). The operating budget begins with the sales
budget and ends with the budgeted income statement. The financial budget
includes the capital budget as well as a cash budget, and a budgeted balance sheet.
The main focus of this chapter is on the various parts of the operating budget and
the cash budget. The budgeted balance sheet is covered briefly, but not
emphasized. A detailed discussion of capital budgeting and investment
management.

THE PURPOSES OF THE MASTER BUDGET


There are a variety of purposes and benefits obtained from budgeting. Consider
the following:Integrates and Coordinates:The master budget is the major planning device for an organization. Thus, it is
used to integrate and coordinate the activities of the various functional areas
within the organization. For example, a comprehensive plan helps ensure that all
the needed inputs (equipment, materials, labor, supplies, etc.) will be at the right
place at the right time when needed, just-in-time if possible. It also helps insure
that manufacturing is planning to produce the same mix of products that
marketing is planning to sell. The idea is that the products should be pulled
through the system on the basis of the sales budget, rather than produced
speculatively and pushed on the sales force. As discussed in Chapter 8, excess
inventory and other resources hide problems and add unnecessary costs.
Communicates and Motivates:Another purpose and benefit of the master budget is to provide a communication
device through which the companys employees in each functional area can see
how their efforts contribute to the overall goals of the organization. This
communication tends to be good for morale and enhance jobs satisfaction. People
need to know how their efforts add value to the organization and its' products and
services. The behavioral aspects of budgeting are extremely important.
Promotes Continuous Improvement:The planning process encourages management to consider alternatives that might
improve customer value and reduce costs. Recall that "Plan" is the first step in
the Shewhart-Deming plan- do-check-action continuous improvement cycle. The
PDCA cycle supports specific improvements in the companys processes. The
financial plan and subsequent financial performance measurements reflect the
financial expectations and consequences of those efforts.
Guides Performance:The master budget also provides a guide for accomplishing the objectives
included in the plan. The budget becomes the basis for the acquisition and
utilization of the various resources needed to implement the plan. Perfection of
the guidance aspect of budgeting can significantly reduce the amount of
uncertainty and variability in the companys operations. In a JIT environment, the
budget can also serve as a guide to vendors.
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Facilitates Evaluation and Control:The master budget provides a method for evaluating and subsequently controlling
performance. We will develop this idea in considerable detail in the following
chapter. Performance evaluation and control is a very powerful and very
controversial aspect of budgeting.

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BENEFITS OF MASTER BUDGET


MOTIVATION:Another purpose and benefit of the master budget is to provide a communication
device through which the companys employees in each functional area can see
how their efforts contribute to the overall goals of the organization. This
communication tends to be good for morale and enhance jobs satisfaction. People
need to know how their efforts add value to the organization and its' products and
services. The behavioral aspects of budgeting are extremely important.
OVERALL BUSINESS BUDGET:One of the main reasons why a master budget is created is to give the business
owner and company executives an overview of the company's budget. Since
smaller budgets for each department only cover the expenses and earnings for
each individual area of the business, a company executive would have to add all
of the departments' budgets up to get one large budget to determine the overall
earnings and spending of the company. The master budget reveals how much the
company is earning and spending as a whole and shows whether the business is
in good or negative financial standing.
PLANNING AHEAD:Another advantage of having a master budget is the ability to identify problems
and plan ahead. For example, the master budget can reveal if one department is
spending beyond its limit, causing the company to spend more than it is earning
each month. In order to repair this budget issue, company executives can identify
which department is spending excessively by looking at individual department
budgets and plan ahead, either by cutting the department's expenses or by making
other budget cuts in other departments for additional spending. It is more difficult
to spot budget issues by only looking at individual department budgets.
GOAL ACHIEVEMENT:In a thorough budgeting system, you set short-term, medium-term and long-term
financial goals. Your goals direct you in allocating portions of income to paying
off debt and putting money away for savings or retirement. Using accurate
numbers to reflect cash inflows and required expenses allows for greater
understanding of the time required to meet financial milestones. In theory,
accurate accounting and disciplined focus should propel you toward each
financial goal you set.
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PLANNING FOR UNEXPECTED:Budgeting puts great emphasis on the known factors of income and typical
expenses. However, a primary benefit of budgeting is that you can equip yourself
to deal with unexpected expenses. The ideal budget allows you to set some
money aside each month in a rainy-day savings fund. Building such a fund is
essential after you meet monthly bill obligations. When you need a new set of
tires or a home appliance breaks down, the rainy- day fund is your way to pay for
these unplanned events without taking on debt.
SIMPLICITY:Cash budgets are relatively easy to use. Once you have established the total
amount of cash available for spending and decided how to allocate it, you can
look at the cash left in your wallet and see at a glance when you are reaching
your spending limit. To see where your money is going, all you have to do is
track your receipts.
INTEGRATES AND CORDINATES:The master budget is the major planning device for an organization. Thus, it is
used to integrate and coordinate the activities of the various functional areas
within the organization. For example, a comprehensive plan helps ensure that all
the needed inputs (equipment, materials, labor, supplies, etc.) will be at the right
place at the right time when needed, just-in-time if possible. It also helps insure
that manufacturing is planning to produce the same mix of products that
marketing is planning to sell. The idea is that the products should be pulled
through the system on the basis of the sales budget, rather than produced
speculatively and pushed on the sales force. As discussed in excess inventory and
other resources hide problems and add unnecessary costs. The integrative nature
of the budget provides a way to implement the lean enterprise concepts of just-intime and the theory of constraints where the emphasis is placed on the
performance of the total system (organization) rather than the various subsystems
or functional areas.

LIMITATIONS AND PROBLEMS

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There are several limitations and problems associated with the master budget that need
to be considered by management. These problems involve uncertainty, behavioral bias
and costs.

Uncertainty:Budgeting includes a considerable amount of forecasting and this activity


involves a considerable amount of uncertainty. Uncertainty affects both sides of
the financial performance dichotomy, (see Exhibit 9-1) but uncertainty on the
revenue side presents a more serious limitation for planning. The sales budget is
frequently based on a forecast supported by a variety of assumptions about the
economy, the actions of the federal reserve board and congress in implementing
monetary and fiscal policy, and the actions of competitors, suppliers, and
customers. The uncertainty associated with sales forecasting creates a greater
problem than uncertainty on the cost side because the other parts of the budget
(see Exhibit 9-4) are derived from the sales forecast. This forces management to
constantly monitor and analyze changes in the economic environment. From the
planning perspective, the inability to accurately forecast the future reduces the
usefulness of the original budget estimates for materials requirements planning
(MRP) and planning for other resource needs. Uncertainty on the cost side tends
to be less of a problem because management has more influence over the
quantities of resources consumed than over the quantities of their own products
purchased by customers. From a performance evaluation and control perspective,
uncertainty on both sides of the financial performance dichotomy is not as much
of a problem because flexible budgets are used to fine tune the original budget to
reflect expectations at the current level of activity.
Behavioral Bias:A second problem involves a variety of behavioral conflicts that are created when
the budget is used as a control device. To be effective, the budget must be used by
the managers it is designed to help. Thus, it must be acceptable to all levels of
management. The behavioral literature on budgeting supports the view that the
budget should reflect what is most likely to occur under efficient operating
conditions. If a budget is to be used as an effective planning and monitoring
device, it should encourage a high level of performance and efficiency, but at the
same time, it should be fair and obtainable. If the budget is viewed by managers
as unfair, (too optimistic) it may intimidate rather than motivate. One way to gain
acceptance is referred to as participative (rather than imposed) budgeting. The
idea is to include all levels of management in the budget preparation process.

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Costs:A third problem or limitation is that budgeting requires a considerable amount of


time and effort. Many companies maintain a twelve month budget on a
continuous basis by adding a future month as the current month expires. While
this does not create a major expenditure for large or medium sized organizations,
smaller companies may find it difficult to justify the costs involved. Many small,
potentially profitable firms do not plan effectively and eventually fail as a result.
Cash flow problems are common, e.g., not having enough cash available (or
accessible through a line of credit with a bank) to pay for merchandise or raw
materials or to meet the payroll. Many of these problems can be avoided by
preparing a cash budget on a regular basis.
Lack of specificity:One of the disadvantages of having a master budget is its lack of specificity. The
dollar amounts and numbers written on the master budget are a collective sum of
all the departments expenses and earnings. For example, the reader would not be
able to determine how much the marketing department is spending on a monthly
basis as the amount will be added to all of the other departments spending as one
sum.
Difficult To Read:Another disadvantage of a master budget is its difficult to update. This is because
of the many categories and numbers that are include in the budget. Due to the
extensive descriptions and charts, a master budget can also be difficult to read
and understand. Keep in mind that the master budget includes all expenses and
income statements of the entire business, so this can be rather extensive if the
business is a corporation or has hundreds of employees in many departments.

THE ASSUMPTIONS OF THE MASTER BUDGET


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Typically, the following simplifying assumptions are made when preparing a master
budget: 1.) sales prices are constant during the budget period, 2.) variable costs per unit
of output are constant during the budget period, 3.) fixed costs are constant in total and
4.) sales mix is constant when the company sells more than one product. These
assumptions facilitate the planning process by removing many of the economic
complexities. The overall effects of these simplifications are illustrated graphically in
Exhibit 9-5. Instead of planning on the basis of the more complicated non-linear model
on the left, the master budget is very similar to the more easily understood linear model
on the right. where the illustrations in Exhibit 9-5 are developed and explained. In
addition, a practical approach for analyzing the differences between budgeted and
actual sales prices, unit cost, sales mix and sales volume. For now, think of Exhibit 9-5
as a preview of those future topics.

MAJOR COMPONENTS OF MASTER BUDGET


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A master budget is the financial document used for projecting the income and expenses of a
company, as opposed to a division, product, or other area of a business. From the master
budget, a small-business owner can develop a variety of reports to help set specific goals
for the business. The major components of a master budget include income and expenses,
overhead and production costs, and the monthly, annual, average, and projection totals. The
following explained are the major components of master budget given below but Master
Budget has two types of components i.e. Operational Budget and Financial Budget.
Revenues Budget Production Budget Direct Manufacturing Labor Costs Budget Ending
Inventory Budget Manufacturing Overhead Costs Budget Direct Materials Costs Budget
Cost of Goods Sold Budget Operating Expense Budget Budgeted Income Statement
Capital Expenditures Budget Cash Budget Budgeted Balance Sheet Budgeted Statement of
Cash Flows Operating Budget Financial Budget.

1. SALES BUDGET
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Developing a sales budget involves the following calculations:


Budgeted Sales $ = (Budgeted Unit Sales)(Budgeted Sales Prices)
Current Period Cash Collections = Current Period Cash Sales + Current
Period Credit Sales Collected in Current Period + Prior Period Credit Sales
Collected in Current Period
These calculations are relatively simple, but where does the budget director
obtain this information? Well, sales forecasting is a marketing function. Sales
estimates are frequently generated by the company's sales representatives who
discuss future needs with customers (wholesalers and retailers). Statistical
forecasting techniques can also be used to make estimates of expected future
sales, considering the company's previous sales performance and various
assumptions about the future economic climate, and the actions of competitors
and consumers. Pricing is also a marketing function, but many prices are based
on costs plus a markup (the supply function) and consideration of what
consumers are willing and able to pay for the product (the demand function).
Thus, the budgeted sales price is usually determined after the budgeted unit cost
has been calculated (see 6b. below).
The information needed to develop an equation for collections is provided by the
finance department and is normally based on past experience. These calculations
are somewhat more involved than they appear to be in the equation above
because of the effects of cash discounts and the time lags between credit sales
and collections. Cash discounts are frequently used to speed up cash inflows.
This puts the funds back to work sooner and reduces the need for short term
loans. However, even with a generous cash discount for prompt payment,
collections for credit sales are typically spread out over several months. The
examples illustrated below provide some of the possibilities.
2. PRODUCTION BUDGET
Preparing a production budget includes consideration of the desired inventory
change as follows:
Units to Be Produced = Budgeted Unit Sales (from 1) + Desired Ending
Finished Goods - Beginning Finished Goods
The desired ending inventory is usually based on the next periods sales budget.
Considerations involve the time required to produce the product, (i.e., cycle time
or lead time) as well as setup costs and carrying costs. In a just-in-time
environment the desired ending inventory is relatively small, or theoretically
zeros in a perfect situation. In the examples and problems in this chapter, the
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ending finished goods inventory is stated as a percentage of the next period's


(month's) unit sales.
3. DIRECT MATERIAL BUDGET
The direct materials budget includes five separate calculations.
a. Quantity of Material Needed for Production = (Units to be Produced)
(Quantity of Material Budgeted per Unit)
The quantity of material required per unit of product is determined by the
industrial engineers who designed the product. Materials requirements are
frequently described in an engineering document referred to asa "bill of
materials".
b. Quantity of Material to be Purchased = Quantity of Material Needed for
Production + Desired Ending Material - Beginning Material
This calculation is more involved than equation 3b appears to indicate because it
includes information for two future periods. The desired ending materials
quantity is normally based on the next period's (month's) materials needed for
production and this amount depends on the third period's budgeted unit sales. Of
course inventories of raw materials (just like finished goods) are kept to a
minimum in a JIT environment. Factors that influence the desired inventory
levels include the reliability of the company's suppliers, as well as ordering and
carrying costs.
c. Budgeted Cost of Material Purchases = (Quantity of Material to be
Purchased)(Budgeted Material Prices)
This amount is needed to determine cash payments. Once the quantity to be
purchased has been determined, the cost of purchases is easily calculated.
Budgeted material prices are provided by the purchasing department.
d. Cost of Material Used = (Quantity needed for Production)(Budgeted
Material Prices)
The cost of materials used is needed in the cost of goods sold budget below.
e. Cash Payments for Direct Material Purchases = Current Period Purchases
Paid in Current Period + Prior Period Purchases Paid in Current Period
The information needed to determine budgeted cash payments is provided by
accounting, (accounts payable) and is usually based on past experience. Normally
the budget should reflect a situation where the company pays promptly to take
advantage of all cash discounts allowed, thus 3e may be equal to 3c.
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4. DIRECT LABOR BUDGET


Fewer calculations are needed for direct labor than for direct materials because
labor hours cannot be stored in the inventory for future use. Time can be wasted,
but not postponed.
a. Direct Labor Hours Needed For Production = (Units to be Produced)
(D.L. Hours Budgeted per Unit)
The amount of direct labor time needed per unit of product is determined by
industrial engineers. Estimates are frequently made using a technique referred to
as motion and time study. This involves measuring each movement required to
perform a task and then assigning a precise amount of time allowed for these
movements. The cumulative time measurements for the various tasks required to
produce a product provide the estimate of a standard time per unit. There are
alternative techniques that are less expensive, but motion and time study provides
estimates that are very precise. Learning curves provide another quantitative
technique that is helpful in establishing labor standards.
b. Budgeted Direct Labor Cost = (D.L. Hours needed for Production)
(Budgeted Rates Per Hour)
The budgeted rates per hour for direct labor are provided by the human resource
department. Frequently the labor (union) contract provides the source for this
information. Many different types of labor may be required with different levels
of expertise and experience. Thus, Equations 4a and 4b may include several
calculations.
5. THE FACTORY OVERHEAD BUDGET
The factory overhead budget is based on a flexible budget calculation as
described. More specifically, the calculation is as follows:
a. Budgeted Factory Overhead Costs = Budgeted Fixed Overhead +
(Budgeted Variable Overhead Rate)(D.L. Hours needed for Production from
4a)
This is a cumulative equation that combines the equations for the company's
various types of indirect resources. This same idea was illustrated in Chapter 4
when introducing predetermined overhead rates. The calculation for cash
payments reflects one of the differences between cash flows and accrual
accounting. Since some costs, like depreciation, do not involve cash payments in
the current period, these costs must be subtracted from the total overhead costs to
determine the appropriate amount.
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b. Cash Payments for Overhead = Budgeted Factory Overhead Cost Depreciation and other costs that do not require cash payments
Alternative Calculation for Budgeted Factory Overhead Costs
Although budgeted factory overhead costs can be calculated in the manner
presented above, there is an alternative approach that illustrates the difference
between budgeted and standard costs. Budgeted factory overhead costs can be
calculated by determining the standard factory overhead costs and then adjusting
for the planned production volume variance. The planned production volume
variance is similar to the capacity (or idle capacity) variance illustrated
in Chapter 4. It is the difference between the denominator inputs used to calculate
the overhead rates, i.e., direct labor hours in our example, and the budgeted direct
labor hours needed for production, multiplied by the budgeted fixed overhead
rate.
The alternative calculation for factory overhead costs is:
Budgeted factory overhead costs = (Total budgeted overhead rate per hour)
(D.L.
hours
needed
for
production
from
4a)
+ Unfavorable planned production volume variance or - Favorable planned
production volume variance
Multiplying the total overhead rate by the number of direct labor hours needed
for production provides the standard or applied overhead costs. However, if the
number of direct labor hours needed for planned production (i.e., budgeted hours)
is not equal to the number of hours used to calculate the overhead rates (i.e.,
denominator hours), then standard fixed overhead costs will not be equal to
budgeted fixed overhead costs. The difference is the planned production volume
variance. This is illustrated graphically in Figure 9-1.

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Since the difference is caused by the way fixed overhead costs are treated, it can
be illustrated by comparing standard fixed overhead costs with budgeted fixed
overhead costs. Figure 9-1 shows that if planned or budgeted hours (BH1) are
less than denominator hours (DH), the planned production volume variance
(PPVV) is unfavorable and represents under applied fixed overhead. However, if
planned or budgeted hours (BH2) are greater than denominator hours (DH), then
the planned production volume variance (PPVV) is favorable and represents over
applied fixed overhead.
The difference between budgeted and standard total factory overhead costs can be
illustrated by simply adding variable overhead costs to the graph. Since budgeted
and standard variable overhead costs are always equal at any level of production,
the difference between standard and budgeted total overhead costs is the same as
the difference between standard and budgeted fixed overhead costs. The
difference is the planned production volume variance. This is illustrated in Figure
9-2

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Summary of the PPVV Concept


At any particular level of production, e.g., 1,000 hours, budgeted and standard
variable overhead costs are always equal. However, budgeted and standard fixed
overhead costs are only equal when the budgeted hours planned for the month are
equal to the denominator hours used to calculate the overhead rates.
The difference between the budgeted hours planned and the denominator hours,
multiplied by the fixed overhead rate is the difference between budgeted and
standard fixed overhead costs as well as the difference between budgeted and
standard total overhead costs.
When working with a budget this difference is referred to as the planned
production volume variance.
The dollar amount for the ending inventory of finished goods is needed below to
determine cost of goods sold. The dollar amounts for ending direct materials and
finished goods are needed for the balance sheet.
a. Ending Direct Materials = (Desired Ending Materials from 3b)(Budgeted
Prices)
b. Budgeted or Standard Unit Cost = (Quantity of D.M. required per Unit)
(Budgeted Prices) + (D.L. Hours required per Unit)(Budgeted Rate)
+ (Total Overhead Rate)(D.L. Hours required per Unit)
The budgeted or standard unit cost can be calculated at any time after the
budgeted quantities per unit and input prices are obtained. The calculation is
placed here because it is needed for 6c.
c. Ending Finished Goods = (Desired Ending Finished Goods from 2)
(Budgeted Unit Cost)
6. ENDING INVENTORY BUDGET
The dollar amount for the ending inventory of finished goods is needed below to
determine cost of goods sold. The dollar amounts for ending direct materials and
finished goods are needed for the balance sheet.
a. Ending Direct Materials = (Desired Ending Materials from 3b)(Budgeted
Prices)
b. Budgeted or Standard Unit Cost = (Quantity of D.M. required per Unit)
(Budgeted Prices) + (D.L. Hours required per Unit)(Budgeted Rate)
+ (Total Overhead Rate)(D.L. Hours required per Unit)
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The budgeted or standard unit cost can be calculated at any time after the
budgeted quantities per unit and input prices are obtained. The calculation is
placed here because it is needed for 6c.
c. Ending Finished Goods = (Desired Ending Finished Goods from 2)
(Budgeted Unit Cost)
7. COST OF GOODS SOLD BUDGET
Cost of goods sold is needed for the income statement. One method of
determining budgeted COGS involves accumulating the amounts from the
previous sub-budgets as follows.
a. Budgeted Total Manufacturing Cost = Cost of Direct Material Used (from
3d.)
+
Cost
of
Direct
Labor
Used
(from
4b.)
+ Total Factory Overhead Costs (from 5a.)
b. Budgeted Cost of Goods Sold = Budgeted Total Manufacturing Cost
(from 7a.) + Beginning Finished Goods (from previous ending or calculate
from 2 and 6b) - Ending Finished Goods (from 6c or calculate from 2 and
6b)
This is the same approach used in Chapter 2 to determine cost of goods sold, but
when developing a budget we typically assume no change in Work in Process.
Therefore, budgeted cost of goods manufactured is equal to budgeted cost of
goods sold.
Alternative Calculation for Budgeted Cost of Goods Sold
Budgeted cost of goods sold can also be calculated by determining standard cost
of goods sold, and then adjusting for the planned production volume variance.
The alternative calculation for cost of goods sold is:
Budgeted Cost of Goods Sold = (Budgeted unit sales)(Budgeted unit cost)
+
Unfavorable
planned
production
volume
variance
or - Favorable planned production volume variance
Although budgeted unit cost equals standard unit cost, budgeted cost of goods
sold is not equal to standard cost of goods sold. Again, the difference between
standard and budgeted costs is the production volume variance. There are two
reasons to become familiar with this alternative. First, it helps strengthen your
understanding an important concept that appears again in subsequent chapters,
e.g., Chapters 10 and 12. A second reason is that the alternative approach
provides a much faster way to calculate budgeted cost of goods sold. Therefore it
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can be used as a stand alone method, or as a way to check the accuracy of your
calculations in 7a and b.
You may wonder why a company would plan a production volume variance in
the budget. This occurs because the denominator activity for a particular month is
normally the average monthly production based on one twelfth of the planned
production for the entire year.
8. SELLING & ADMINISTRATIVE EXPENSE BUDGET
The preparation of the selling and administrative expense budgets is very similar
to the approach used for factory overhead.
a. Budgeted Selling and Administrative Expenses = Budgeted Fixed Selling
& Administrative Expenses + (Bud Variable Rate as a Proportion of Sales $)
(Budgeted Sales $)
b. Cash Payments for Selling & Administrative Expenses = Budgeted
Selling & Administrative Expenses - Depreciation and other cost which do
not require cash payments
Although we will place less emphasis on this part of the master budget, (mainly
to simplify the illustrations) these costs are usually significant. Also remember
that many appropriation budgets (treated as fixed costs) may be included,
particularly for certain administrative costs.
9. BUDGETED INCOME STATEMENT
Preparing the budgeted income statement involves combining the relevant
amounts from the sales, cost of goods sold and selling & administrative expense
budgets and then subtracting interest, bad debts and income taxes to obtain
budgeted net income. These amounts are provided by the finance department. In
a comprehensive practice problem, the applicable amount for interest expense
may need to be calculated from information associated with the cash budget. Bad
debt expense is based on the expected proportion of uncollectible stated in the
information related to cash collections.
a. Budgeted Sales $ - Budgeted Cost of Goods Sold = Budgeted Gross Profit
b. Budgeted Gross Profit - Budgeted Selling & Administrative Expenses =
Operating Income
c. Operating Income - Interest Expense - Bad Debts Expense = Net Income
Before Taxes
d. Net Income Before Taxes - Income Taxes = Net Income After Taxes
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THE FINANCIAL BUDGET


As indicated in Exhibit 9-4, the financial budget includes the cash budget, the
capital budget and the budgeted balance sheet. The cash budget and budgeted
balance sheet are discussed below.
10. CASH BUDGET
a. Budgeted Cash Available = Beginning Cash Balance + Budgeted Cash
Collections from 1
b. Budgeted Cash Excess or Deficiency = Budgeted Cash Available Budgeted Cash Payments from 3e, 4b, 5b and 8b
c. Ending Cash Balance = Cash Excess or Deficiency + Borrowings Repayments including Interest

11. BUDGETED BALANCE SHEET


Preparing the budgeted balance sheet involves accumulating information from
the previous periods balance sheet, the various operating sub-budgets, the cash
budget and other accounting records.
ASSETS
a. Current Assets:
Cash (from the cash budget 10c)
Accounts Receivable (from the sales budget and previous balance sheet)
Direct materials (from the ending inventory budget 6a)
Finished goods (from the ending inventory budget 6c)
b. Long Term Assets:
Land (from previous balance sheet and budgeted activity)
Buildings (from previous balance sheet and budgeted activity)
Equipment (from previous balance sheet and budgeted activity)
Accumulated depreciation (from the accounting records)
Total Assets
LIABILITIES

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c. Current Liabilities:
Accounts Payable (from various operating sub-budgets)
Taxes Payable (from income statement)
d. Long term Liabilities
Total Liabilities
SHAREHOLDERS EQUITY
e. Common Stock (from previous balance sheet and budgeted activity)
f. Retained Earnings (from previous balance sheet and income statement)
Total Shareholders Equity
Total Liabilities and Shareholders Equity

STEPS TO PREPARE MASTER BUDGET


A master budget helps you to plan and coordinate all of the different budgets needed to
run an enterprise. It includes budgets for sales, production or purchases, selling and
administrative expenses, an income statement, a cash flows statement and a balance
sheet. In the budgeting process, the master budget provides a single map explaining
how the company intends to earn profits and positive cash flow for the coming period.

Project Sales:Start the budgeting process by estimating sales. Go to the sales or marketing department
and request anticipated sales for the coming period. This estimate could be based on
economic projections, consultants' reports, or a simple analysis of trends in prior years.

Plan Production:Figure out the number of units of each product that you need to produce, using the
following formula: Expected sales (in units) + Desired ending inventory (in units) Beginning inventory (in units) = Units to be produced. This assumes that you're a
manufacturer. If you're a retailer that doesn't produce its goods, then use a similar
formula to estimate the number of units that need to be purchased: Expected units to be
sold + Desired units of ending inventory - Units of beginning inventory = Units to be
purchased. Multiply the number of units to be produced (or purchased) by the cost per
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unit to figure out the total cost of units to be produced (or purchased). Manufacturers
can skip to Step 6.

Design Labor Budget:The direct labor budget estimates how much work must be done to meet your
production plans, and the number of employees needed. To figure out the direct labor
budget, ascertain (1) how many hours of direct labor are needed to produce each unit
and (2) the average direct labor rate. Multiply both these factors by the number of Units
to be produced that you estimated in the Step 2 Production budget: Hours needed to
produce each unit x Average direct labor rate x Units to be produced = Total direct labor
costs To figure out the number of employees needed, divide total hours to be worked by
the number of hours worked per week: (Hours needed to produce each unit x Units to
be produced) Average number of hours worked per week by each employee = Number
of employees needed for production.

Plot Overhead:To prepare the Overhead budget, multiply the number of Units to be produced by the
Variable overhead cost per unit. Then add Total fixed overhead cost: (Units to be
produced x Variable overhead cost per unit) + Total fixed overhead = Total overhead. To
estimate the Variable overhead cost per unit and Total fixed overhead, account analysis,
a scatter graph of overhead, the high-low method, or regression analysis will help you
understand the relationship between overhead costs and volume.

Estimate Selling and Administrative Expenses:Sales don't happen automatically. You need to pay for sales agents, advertising, and
other marketing costs. All of these estimated costs are tabulated in the Selling and
administrative expense budget.

Layout Capital Acquisitions Budget:Factory equipment requires careful maintenance and occasionally replacement. You
may also need to add more equipment to make the needed number of Units to be
produced. Therefore, set up a capital acquisitions budget that includes the cost of any
new equipment or property that needs to be purchased during the coming period.

Budget an Income Statement:Based on all of the information in the prior steps, you should be able to project an
income statement for the coming period. This will follow the basic formula for net
income: Sales - Cost of goods sold - Other expenses = Net income A sale comes from
the Sales budget (Step 1). To estimate cost of goods sold, multiply the number of units
expected to be sold (see Step 1) by the estimated cost per unit (a sum of Steps 3, 4, and
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5). Other expenses include Selling and administrative expenses (see Step 6), general
expenses, depreciation expenses, and also income tax expenses. When complete, the
budgeted income statement answers a critically important question: Will your company
be profitable next year? If you're dissatisfied with the estimated profits, then you may
need to go back to Step 1 and rework your numbers.

Formulate a Budgeted Cash Flows Statement:A budgeted cash flows statement adds all of the expected cash receipts and subtracts the
disbursements for the coming period. Cash receipts come from sales - but be careful!
Don't list the sales themselves, but the cash flows from sales. This means adjusting for
the rate at which you collect payment for your sales. Cash disbursements need to be
made for purchases of raw materials (Step 3), direct labor (Step 4), overhead costs (Step
5), selling and administrative expenses (Step 6), and capital acquisitions (Step 7).

Bring Down a Budgeted Balance Sheet:The budgeted balance sheet is based on the following formula: Assets = Liabilities +
Stockholders' Equity It explains how the business plan for the coming period will affect
the company's finance position at the end of that period.

CONCLUSION:I want to conclude my project by saying that a master budget is only a tool. It
does not mean that if the company has an excellent strategic tool, everything will
work out right. Nothing cans substitute for teamwork in the organization.
Everyone should be united in achieving the goals and leading the race in this
competitive world of business.

REFERENCES:Following are the references from where the information is been collected: http://www.accountingtools.com/master-budget
http://maaw.info/Chapter9.htm
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http://www.slideshare.net/master-budget-45761795
http://accountingexplained.com/managerial/master-budget
http://www.myaccountingcourse.com/accounting-dictionary/master-budget
http://smallbusiness.chron.com/major-components-master-budget-59414.html

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