COST ACCOUNTING- A MANAGERIAL

EMPHASIS, 16TH EDITION,

SRIKANT/ GEORGE/ MADHAV/
CHRISTOPHER

Chapter 6

Master Budgeting
and
Responsibility Accounting
BUDGET DEFINED
 The quantitative expression of a proposed
plan of action by management for a specified
period, and
 An aid to coordinating what needs to be done
to implement that plan
 May include both financial and nonfinancial
data
ADVANTAGES OF BUDGETS
 Providesa framework for judging
performance
 Motivates managers and other employees

 Promotes coordination and communication

among subunits within the company
COMPONENTS OF MASTER BUDGETS
 Operating Budget – building blocks leading to
the creation of the Budgeted Income Statement

 FinancialBudget – building blocks based on

the Operating Budget that lead to the creation
of the Budgeted Balance Sheet and the
Budgeted Statement of Cash Flows
BASIC OPERATING BUDGET STEPS

1. Prepare the Revenues Budget

2. Prepare the Production Budget (in Units)
3. Prepare the Direct Materials Usage Budget and
Direct Materials Purchases Budget
4. Prepare the Direct Manufacturing Labor Budget
5. Prepare the Manufacturing Overhead Costs
Budget
6. Prepare the Ending Inventories Budget
7. Prepare the Cost of Goods Sold Budget
8. Prepare the Operating Expense (Period Cost)
Budget
9. Prepare the Budgeted Income Statement
 BASIC FINANCIAL BUDGET STEPS
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
Budgeting Overview Flowchart
Operating Budget Financial Budget

Revenues
Budget

Ending Capital
Production
Inventory Expenditures
Budget
Budget Budget

Direct
Direct Manufacturing
Manufacturing
Materials Overhead
Labor Costs Cash Budget
Costs Budget Costs Budget
Budget

Cost of Goods
Sold Budget
Budgeted
Balance Sheet

Operating
Expense
Budget Budgeted
Statement of
Cash Flows
Budgeted
Income
Statement
OTHER BUDGETING ISSUES
 Financial-planning software may be employed to
conduct sensitivity (“what-if”) analysis to assist in the
budgetary process. For e.g. Enterprise Resource
Planning (ERP)
 “what-if” technique examines how a result will

change if the original predicted data are not

achieved or if an underlying assumption changes
 Kaizen Budgeting – incorporating continuous
improvement factors in the budgeting process
 Activity-Based Budgeting – incorporating Activity-
Based Costing in the budgetary process