Chapter 6

Master Budget and Responsibility Accounting

Budgets and the Budgeting Cycle 

A budget is (a) the quantitative expression of a proposed plan of action by management for a specified period of time 

and

(b) an aid to coordination what needs to be done to implement that plan.

Strategic Plans and Operating Plans

Questions to ask? 

1. What are our objectives?

2. Are the markets for our products local, regional, national, or global?

3. What trends affect our markets?

4. How are we affected by the economy, our industry, and our competitors?

5. What organizational and financial strucures serve us best?

6. What are the risks and opportunities of alternative strategies, and what are our contingency plans if our preferred plan fails? 

Budgeting Cycle and Master Budget

Master Budget 

The master budget expresses management's operating and financial plans for a specified period and it includes a set of budgeted financial statements.

Evolves from both operating and financing decisions 

Operating decisions 

How do we best use our limited resources? 

Financing decisions 

How do we obtain the funds to acuire our resources? 

Advantages of Budgets 

Budgets:

1. Promote coordination and communication among subunits within the company

2. Provide a framework for judging performance

3. Motivate managers and other employees 

Coordination and Communication 

Coordination is meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals.

Communication is making sure those goals are understood and accepted by all employees.

A rolling or continuous budget is a budget that is always available for a specified future period.

Steps in Developing an Operating Budget 

1. Revenues Budget

2. Production Budget (In Units)

3. DM Usage Budget & DM Purchases Budget

4. Direct Manufacturing Labor Cost Budget

5. MOH Cost Budget

6. Ending Inventories Budget

7. COGS Budget

8. Nonmanufacturing Cost Budget

9. Budgeted Income Statement 

1. Revenues Budget

1. Revenues Budget

(Selling Price)*(Units Sold) = Total Revenues

2. Production Budget (In Units)

2. Production Budget (In Units)

Budget Sales (Units) 

+

Target Ending finished goods inventory (Units)

-

Beginning Finished Goods Inventory (Units)

=

Budgeted Production (Units) 

3. DM Usage Budget & DM Purchases Budget

3. DM Usage Budget & DM Purchases Budget

Used + Target End Inventor - Beg. Inventory = Purchases

Multiply Purchases By Price

[Remember: DM is NOT production, it is production times materials needed per unit]  

4. Direct Manufacturing Labor Cost Budget

[Production (In Units)]*DL Hours Needed Per Unit =

Total Hours Needed

(Total Hours Needed)*(Wage Rate) = DML Cost

5. MOH Cost Budget

(Total Budgeted MOH Cost/Budgeted Direct Manufacturing Labo-hours) = Budgeted MOH Rate

6. Ending Inventories Budget

 Calculate Price Per Unit of Finished Goods:

DM Cost per unit of Input*Input per unit of output

=

Total Unit DM Cost

DL Cost per unit of Input*Input per unit of output

=

Total Unit DL Cost

MOH Cost per unit of Input*Input per unit of output

=

Total MOH Cost

Total DM + Total DL + Total MOH = Total Unit Cost

6. Ending Inventories Budget (Part 2)

Compute DM Part:

DM Cost Per Unit*Target Units = Total DM Inventory

Compute Finished Goods Part:

Cost Per Unit*Target Units = Total FG Inventory

 DM Inventory +FG Inventory = Total End Inventory

7. Cost of Goods Sold Budget

8. Prepare the Nonmanufacturing Cost Budget

If variable cost are used then it will be at a rate based on budgeted revenues

9. Budgeted Income Statement

Revenues

Less: Cost of Goods Sold

= Gross Margin

Less: Operating Cost (Step 8)

= Operating Income 

Kaizen Budgeting 

Budgeting for continuous improvement in labor-hours per unit 

Budgetary Slack 

The practice of underestimating budgeted revenues and/or overestimating budgeted cost to make targets more easily achievable.