The Master Budget

The Master Budget
Chapter 7
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7-1
Advantages of Budgets
Goals and
Budgets
objectives
A budget allows systematic rather

than chaotic reaction to change.
Advantages of Budgets
Compels
managers
to think Provides definite
ahead expectations that
are the best framework
to evaluate performance
Aids managers in
coordinating their efforts
Types of Budgets
Strategic plan Long-range plan
Capital budget Master budget
Continuous budget
Strategic Plan
The most forward-looking budget is the

strategic plan, which sets the overall
goals and objectives of the organization.
Long-Range Plan
The strategic plan leads to long-range

planning, which produces
forecasted financial statements
for five- to ten-year periods.
Capital Budget
Long-range plans…
are coordinated with capital budgets,

which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.
Master Budget
Sales
The master budget
summarizes the Production
planned activities
of all subunits of Distribution
an organization.
Finance
Continuous Budget
are a common form of

master budgets that
Rolling budgets... add a month in the
future as the month
just ended is dropped.
Components of Master Budget
Operating budget
Financial/Cash
budget
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 7 - 10
Steps in Preparing the
Master Budget
The principal steps in preparing
the master budget are:
1. Basic data
a. Sales budget
b. Cash collections from customers
c. Purchases budget
d. Disbursements for purchases
e. Operating expense budget
f. Disbursements for operating expenses
Steps in Preparing the
Master Budget
1. Basic data
2. Operating budget
3. Financial/Cash budget
Operating Budget
Sales Cash collections

budget from customers
Purchases Disbursements
budget for purchases
Operating expenses Disbursements for

budget operating expenses
Cash Collections
It is easiest to prepare budgeted

cash collections at the same
time as the sales budget.
Cash collections include the current

month’s cash sales plus the
previous month’s credit sales.
Purchases Budget
Beginning inventory +
Budgeted purchases –
Cost of goods sold
= Desired ending inventory
Disbursements for Purchases
For example, 50% of the current month’s

purchases and 50% of the previous
month’s purchases may be included.
The total disbursements are then

used in preparing the cash budget.
Operating Expense Budget
The budgeting of operating expenses

depends on several factors.
Month-to-month changes in sales

volume and other cost-driver activities
directly influence many operating expenses.
Expenses driven by sales volume

include sales commissions
and many delivery expenses.
Other expenses are not influenced by sales

or other cost-driver activity and are regarded
as fixed, within appropriate relevant ranges.
Rent Depreciation
Insurance Salaries
Operating Expense Disbursements
Disbursements for operating expenses are

based on the operating expense budget.
Operating Expense Disbursements
For example, 50% of last month’s

and this month’s wages and
commissions plus miscellaneous
and rent expenses may be included.
The total of these disbursements is then

used in preparing the cash budget.
Budgeted Income Statement
The income statement will be complete

after addition of the interest expense,
which is computed after the financial/
cash budget has been prepared.
Budgeted income from operations

is often a benchmark for judging
management performance.
Financial/Cash Budget
The cash budget has the following major

sections:
 available cash balance
 cash receipts disbursements
 cash needed from (or used for) financing
 ending cash balance
Available cash balance

= Beginning cash balance
– Minimum cash balance desired.
Cash receipts depend on collections from

customers’ accounts receivable, cash sales,
and on other operating income sources.
Cash disbursements for purchases depend

on the credit terms extended by suppliers
and the bill-paying habits of the buyer.
Payroll depends on wage, salary, and

commission terms and on payroll dates.
Disbursements for some costs and expenses

depend on contractual terms for instalment
payments, mortgage payments, rents,
leases, and miscellaneous items.
Other disbursements include outlays for

fixed assets, long-term investments,
dividends, and the like.
Management determines the minimum

cash balance desired depending
on the nature of the business
and credit arrangements.
Financing requirements depend on how

the total cash available compares
with the total cash needed.
Needs include the disbursements plus

the desired ending cash balance.
Beginning cash balance

+ Receipts – Disbursements
+ Cash from financing
= Ending cash balance
The cash from financing can be

either positive (borrowing)
or negative (repayment).
Budgeted Balance Sheet
The final step in preparing the master budget

is to construct the budgeted balance sheet
that projects each balance sheet item in
accordance with the business plan.
Sales Forecast
A sales forecast is a prediction of sales

under a given set of conditions.
Sales forecasts are usually prepared under

the direction of the top sales executive.
Factors to Consider When
Forecasting Sales
Past patterns of sales
Estimates made by the sales force
General economic conditions
Competitors’ actions
Factors to Consider When
Forecasting Sales
Changes in the firm’s prices
Changes in product mix
Market research studies
Advertising and sales promotion plans
Getting Employees to Accept
the Budget
To fully benefit from budgets, an

organization needs the support
of all the firm’s employees.
The attitude of top management will

heavily influence lower-level
workers’ and managers’ attitudes.
Getting Employees to Accept
the Budget
Another problem that can negate the benefits

of budgeting arises if budgets stress one set
of performance goals, but employees and
managers are rewarded for different
performance measures.
Participative Budgeting
Budgets created with the active

participation of all affected employees
are generally more effective than
budgets imposed on subordinates.
Exercise
Question:
Many non-profit organisations use budgets
primarily to limit spending. Why does this limit
the effectiveness of budgets?
[This tests your knowledge of the many roles
of budgets.]
Exercise
- Helps managers to plan ahead.

- Provides definite expectations that are the
best framework to evaluate performance
- Aids managers in coordinating their efforts
- A decision tool. It helps managers project
the results of their decisions, thereby aiding
them in making the right decisions.
- Provides a base for adapting to change.

The Master Budget

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The Master Budget

A budget allows systematic rather

Strategic plan Long-range plan

Capital budget Master budget

The most forward-looking budget is the

The strategic plan leads to long-range

are coordinated with capital budgets,

are a common form of

Sales Cash collections

Operating expenses Disbursements for

It is easiest to prepare budgeted

Cash collections include the current

For example, 50% of the current month’s

The total disbursements are then

The budgeting of operating expenses

Month-to-month changes in sales

Expenses driven by sales volume

Other expenses are not influenced by sales

Disbursements for operating expenses are

For example, 50% of last month’s

The total of these disbursements is then

The income statement will be complete

Budgeted income from operations

The cash budget has the following major

Available cash balance

Cash receipts depend on collections from

Cash disbursements for purchases depend

Payroll depends on wage, salary, and

Disbursements for some costs and expenses

Other disbursements include outlays for

Management determines the minimum

Financing requirements depend on how

Needs include the disbursements plus

Beginning cash balance

The cash from financing can be

The final step in preparing the master budget

A sales forecast is a prediction of sales

Sales forecasts are usually prepared under

Past patterns of sales

Estimates made by the sales force

General economic conditions

Changes in the firm’s prices

Changes in product mix

Market research studies

Advertising and sales promotion plans

To fully benefit from budgets, an

The attitude of top management will

Another problem that can negate the benefits

Budgets created with the active

- Helps managers to plan ahead.

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