chapter 22 master budgets. learning objectives 1.describe budgeting objectives, benefits, and...

Chapter 22Master Budgets

Learning Objectives

1. Describe budgeting objectives, benefits, and procedures and how human behavior influences budgeting

2. Define budget types and the components of the master budget

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Learning Objectives

3. Prepare an operating budget for a manufacturing company

4. Prepare a financial budget for a manufacturing company

5. Describe how information technology can be used in the budgeting process

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Learning Objectives

6. Prepare an operating budget for a merchandising company (Appendix 22A)

7. Prepare a financial budget for a merchandising company (Appendix 22A)

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Learning Objective 1

Describe budgeting objectives, benefits, and procedures and how human behavior influences budgeting

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Why Do Managers Use Budgets?

• A budget is a financial plan that managers use to coordinate a business’s activities.

• Managers use budgets to:– Develop strategies.– Plan and budget for specific actions to achieve

goals.– Implement the plan.– Take corrective action.

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Budgeting Objectives

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Budgeting Objectives

• Budgeting requires managers to plan for the company’s future.

• The budget coordinates a company’s activities.

• A budget provides a benchmark that motivates employees and helps managers evaluate performance.

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Benchmarking

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Budgeting Procedures

• Budgeting procedures vary from company to company.

• Budgeting should include input from all levels within the organization.

• Budgeting usually begins several months before the beginning of the budget period.

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Budgeting and Human Behavior

• Managers must: – Support the budget – Show employees how budgets can help them

achieve better results– Require that employees participate in

developing the budget• Budgetary games:– Budgetary slack occurs when managers

intentionally understate expected revenues or overstate expected expenses.

– Spend it or lose it.

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Learning Objective 2

Define budget types and the components of the master budget

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Are There Different Types of Budgets?

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Static and Flexible Budgets

• A static budget is a budget prepared for only one level of sales volume.

• A flexible budget is a budget prepared for various levels of sales volume.

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Master Budgets

• The master budget is the set of budgeted financial statements and supporting schedules for the entire organization.

• The capital expenditures budget presents the company’s plan for purchasing long-term assets.

• A financial budget includes the cash budget and the budgeted financial statements.

• The cash budget details how the business expects to go from the beginning cash balance to the ending cash balances.

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Master Budgets

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Learning Objective 3

Prepare an operating budget for a manufacturing company

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How Are Operating Budgets Prepared for a Manufacturing Company?

• The master budget includes the following budgets:– Sales budget– Production budget– Direct materials budget– Direct labor budget– Manufacturing overhead budget– Cost of goods sold budget– Selling and administrative budget

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How Are Operating Budgets Prepared for a Manufacturing Company?

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Sales Budget

• The forecast of sales revenue is the cornerstone of the master budget.

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Production Budget

• The production budget is the basis for product costs budgets, direct materials budget, direct labor budgets, and manufacturing overhead budgets.

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Production Budget

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Direct Materials Budget

• After completing the production budget, Smart Touch Learning needs to determine the product costs for the tablets.

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Direct Materials Budget

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Direct Labor Budget

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Manufacturing Overhead Budget

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• The predetermined overhead allocation rate is used to allocate the indirect overhead costs to the tablets produced by Smart Touch Learning.

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Manufacturing Overhead Budget

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Cost of Goods Sold Budget

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Selling and Administrative Expense Budget

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Learning Objective 4

Prepare a financial budget for a manufacturing company

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How Are Financial Budgets Prepared for a Manufacturing Company?

• The financial budgets include the cash budget and the budgeted financial statements:– Budgeted income statement– Budgeted balance sheet– Budgeted statement of cash flows

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Capital Expenditures Budget

• The purchase of long-term assets is part of a strategic plan.

• Capital expenditures are purchases of long-term assets, such as: – Delivery trucks– Computer systems– Office furniture– Manufacturing equipment

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Cash Budget

• The cash budget pulls information from the other budgets previously prepared.

• The cash budget has three sections:– Cash receipts– Cash payments– Short-term financing

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Cash Receipts

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Cash Payments

• Capital expenditures

• Product costs:

– Direct materials purchases

– Direct labor costs

– Manufacturing overhead costs

• Selling and administrative expenses

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Short-Term Financing

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Short-Term Financing

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Short-Term Financing

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Short-Term Financing

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Short-Term Financing

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Budgeted Income Statement

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• Below is a summary of the sources used to calculate the budgeted income statement.

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Budgeted Income Statement

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Budgeted Balance Sheet

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Budgeted Statement of Cash Flows

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Learning Objective 5

Describe how information technology can be used in the budgeting process

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How Can Information Technology Be Used in the Budgeting Process?

• To conduct sensitivity analysis• To combine individual unit budgets to

create the companywide master budget

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Learning Objective 6

Prepare an operating budget for a merchandising company (Appendix 22A)

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How Are Operating Budgets Prepared for a Merchandising Company?

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Sales Budget

Sales Budget

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Inventory, Purchases, and Cost of Goods Sold Budget

• The cost of goods sold computation shows the relationship between inventory, purchases, and ending inventory:

• The equation can be rearranged to find the amount of purchases required:

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Inventory, Purchases, and Cost of Goods Sold Budget

Selling and AdministrativeExpense Budget

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Learning Objective 7

Prepare a financial budget for a merchandising company (Appendix 22A)

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How Are Financial Budgets Prepared for a Merchandising Company?

• The budgets for a merchandising company include:– Capital expenditures budget– Cash budget– Budgeted income statement – Budgeted balance sheet– Budgeted statement of cash flows

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Cash Receipts

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Cash Payments

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Cash Payments

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Short-Term Financing

• Companies often borrow funds to maintain a minimum cash balance.

• For example, Greg’s Games borrows cash in $1,000 increments at an annual interest rate of 12%.

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Short-Term Financing

Budgeted Income Statement

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Budgeted Balance Sheet

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Budgeted Balance Sheet

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Budgeted Statement of Cash Flows

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