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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