COST ACCOUNTING- A MANAGERIAL

EMPHASIS, 13TH 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
 Provides a 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

 Financial
Budget – 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