Master Budget

and
Responsibility Accounting

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1. Describe the master budget and explain its
benefits
2. Describe the advantages of budgets
3. Prepare the operating budget and its
supporting schedules
4. Use computer-based financial planning
models for sensitivity analysis
5. Describe responsibility centers and
responsibility accounting

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6. Recognize the human aspects of budgeting
7. Appreciate the special challenges of
budgeting in multinational companies

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A budget is the quantitative expression of a
proposed plan of action by management for a
specified period.
 A budget is an aid to coordinating what needs
to be done to implement that plan.

A budget generally includes both the plan’s

financial and nonfinancial aspects and serves as a
blueprint for the company to follow in an
upcoming period.

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 Communicate directions and goals to
different departments of a company to help
them coordinate the actions they must
pursue to satisfy customers and succeed in
the marketplace.
 Judge performance by measuring financial
results against planned objectives, activities,
and timelines to learn about potential
problems.
 Motivate employees to achieve their goals.

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To develop successful strategies, managers must
consider questions such as the following:
1. What are our objectives?
2. How do we create value for our customers
while distinguishing ourselves from our
competitors?
3. Are the markets for our products local,
regional, national or global?
4. What trends affect our markets?
5. What organizational and financial structures
serve us best?
6. What are risks and opportunities of alternative
strategies and what are our contingency plans
if our preferred plan fails?
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1. Before the start of a fiscal year, managers
at all levels take into account past
performance, market feedback,
anticipated future changes and other
indicators to initiate plans for the next
period.
2. Senior managers give subordinate
managers a frame of reference against
which they will compare actual results.
3. Managers and management accountants
investigate any deviations from the plan.
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The master budget is at the core of the
budgeting process. It expresses management’s
operating and financial plans for a specified
period:
 Operating decisions deal with how to best use
the limited resources of an organization. (the
operating budget)
 Financial decisions deal with how to obtain the
funds to acquire those resources. (the financial
budget)

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 Promotes coordination and communication
among subunits within the company.
 Provides a framework for judging
performance and facilitating learning.
 Motivates managers and other employees.

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 Top managers want lower-level managers to
participate in the budgeting process because
they have more specialized knowledge of
day-to-day management, however…
 The budgeting process is time-consuming,
and
 Upper-level management’s support is crucial

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The timeline for a budget is dependent on the
motive for creating the budget.
The most frequently used budget period is 1
year.
Businesses may also use a rolling budget. This
budget is always available for a specified
future period, by continually adding a month,
quarter, or year to the period just ended.

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1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among
alternatives
5. Implement the decision, evaluate
performance and learn

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1. Prepare the revenues budget (schedule 1;
the starting point) Page 206
2. Prepare the production budget (schedule
2; in units). Page 207
3. Prepare the direct materials usage budget
and direct materials purchases budget
(schedule 3) Pages 207 and 208
4. Prepare the direct manufacturing labor
budget (schedule 4) Page 208

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5. Prepare the manufacturing overhead costs
budget (schedule 5) Page 210
6. Prepare the ending inventories budget
(schedule 6A, units; schedule 6B, dollars)
Pages 211 and 212
7. Prepare the cost of goods sold budget
(schedule 7) Page 212
8. Prepare the operating expense (period
cost) budget (schedule 8) Page 213
9. Prepare the budgeted income statement
Exhibit 6-3 page 213
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Based on the operating budgets:
1. Prepare the capital expenditures budget.
2. Prepare the cash budget.
3. Prepare the budgeted balance sheet.
4. Prepare the budgeted statement of cash
flows.

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 Financial planning models may be
employed to conduct sensitivity (“what-
if”) analysis to assist in the budgetary
process.
 A “what-if” analysis or sensitivity
analysis is a technique that examines
how a result will change if the original
predicted data or underlying assumption
change.

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 Sensitivity analysis is used to assist managers in planning
and budgeting.
 Sensitivity analysis is a “what if” technique that illustrates
the impact of changes from the predicted data.
 Two scenarios are being considered for Stylistic
Furniture’s (the company from the textbook) budget.

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 Responsibility center—a part, segment, or
subunit of an organization whose manager is
accountable for a specified set of activities.
 Responsibility accounting—a system that
measures the plans, budgets, actions, and
actual results of each responsibility center.
 Generally, we consider 4 levels of
responsibility center.

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1. Cost—accountable for costs only
2. Revenue—accountable for revenues only
3. Profit—accountable for revenues and costs
4. Investment—accountable for investments,
revenues, and costs

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 Budgets offer feedback in the form of
variances: actual results deviate from
budgeted targets.
 Variances provide managers with:
 Early warning of problems
 A basis for performance evaluation
 A basis for strategy evaluation

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 Controllability is the degree of influence that a
manager has over costs, revenues, or related
items for which he or she is being held
responsible.
 Responsibility accounting helps managers to first
focus on whom they should ask to obtain
information and not on whom they should blame.
 Responsibility accounting focuses on gaining
information and knowledge, not only on control.
 The fundamental purpose of responsibility
accounting is to enable future improvement.

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 Budgetary slack is the practice of
underestimating budgeted revenues or
overestimating budgeted costs to make
budgeted targets easier to achieve.
 Stretch targets are targets that are
challenging but achievable to focus effort on
achieving the targets.
 Kaizen Budgeting is a practice whereby each
budget process incorporates continuous
improvement from past results.

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 Internationalcompanies face significant
exchange rate uncertainty rendering budgets
for traditional purposes of evaluating a firm’s
performance moot but still very useful as a
tool to help manager’s adapt plans and
coordinate actions when conditions are
volatile.

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TERMS TO LEARN PAGE NUMBER REFERENCE
Activity-based budgeting(ABB) Page 209
Budgetary slack Page 218
Cash budget Page 225
Continuous budget Page 202
Controllability Page 217
Controllable cost Page 217
Cost center Page 216
Financial budget Page 203
Financial planning models Page 213
Investment center Page 216

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TERMS TO LEARN PAGE NUMBER REFERENCE
Kaizen budgeting Page 220
Master budget Page 199
Operating budget Page 203
Organization structure Page 216
Pro forma statements Page 199
Profit center Page 216
Responsibility accounting Page 216

Responsibility center Page 216

Revenue center Page 216
Rolling budget Page 202
Rolling forecast Page 202

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