Copyright © 2015 Pearson Education, Inc. All Rights Reserved. Master Budget and Responsibility Accounting.

Copyright © 2015 Pearson Education, Inc. All Rights Reserved.

Master Budgetand

Responsibility Accounting


1. Describe the master budget and explain its benefits

2. Describe the advantages of budgets3. Prepare the operating budget and its

supporting schedules4. Use computer-based financial planning

models for sensitivity analysis5. Describe responsibility centers and

responsibility accounting

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6. Recognize the human aspects of budgeting

7. Appreciate the special challenges of budgeting in multinational companies

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

A budget is an aid to coordinating what needs to be done to implement that plan.

A budget generally includes both the plan’s financial and nonfinancial aspects and serves as a blueprint for the company to follow in an upcoming period.

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Communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace.

Judge performance by measuring financial results against planned objectives, activities, and timelines to learn about potential problems.

Motivate employees to achieve their goals.

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To develop successful strategies, managers must consider questions such as the following:1.What are our objectives?2.How do we create value for our customers while distinguishing ourselves from our competitors?3.Are the markets for our products local, regional, national or global? 4.What trends affect our markets?5.What organizational and financial structures serve us best?6.What are risks and opportunities of alternative strategies and what are our contingency plans if our preferred plan fails?

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1. Before the start of a fiscal year, managers at all levels take into account past performance, market feedback, anticipated future changes and other indicators to initiate plans for the next period.

2. Senior managers give subordinate managers a frame of reference against which they will compare actual results.

3. Managers and management accountants investigate any deviations from the plan.

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The master budget is at the core of the budgeting process. It expresses management’s operating and financial plans for a specified period:

Operating decisions deal with how to best use the limited resources of an organization. (the operating budget)

Financial decisions deal with how to obtain the funds to acquire those resources. (the financial budget)

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Promotes coordination and communication among subunits within the company.

Provides a framework for judging performance and facilitating learning.

Motivates managers and other employees.

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Top managers want lower-level managers to participate in the budgeting process because they have more specialized knowledge of day-to-day management, however…

The budgeting process is time-consuming, and

Upper-level management’s support is crucial

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The timeline for a budget is dependent on the motive for creating the budget.The most frequently used budget period is 1 year.Businesses may also use a rolling budget. This budget is always available for a specified future period, by continually adding a month, quarter, or year to the period just ended.

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1. Identify the problem and uncertainties2. Obtain information3. Make predictions about the future4. Make decisions by choosing among

alternatives5. Implement the decision, evaluate

performance and learn

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1. Prepare the revenues budget (schedule 1; the starting point) Page 206

2. Prepare the production budget (schedule 2; in units). Page 207

3. Prepare the direct materials usage budget and direct materials purchases budget (schedule 3) Pages 207 and 208

4. Prepare the direct manufacturing labor budget (schedule 4) Page 208

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5. Prepare the manufacturing overhead costs budget (schedule 5) Page 210

6. Prepare the ending inventories budget (schedule 6A, units; schedule 6B, dollars) Pages 211 and 212

7. Prepare the cost of goods sold budget (schedule 7) Page 212

8. Prepare the operating expense (period cost) budget (schedule 8) Page 213

9. Prepare the budgeted income statement Exhibit 6-3 page 213

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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.

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Copyright © 2015 Pearson Education, Inc. All Rights Reserved.6-16


Financial planning models may be employed to conduct sensitivity (“what-if”) analysis to assist in the budgetary process.

A “what-if” analysis or sensitivity analysis is a technique that examines how a result will change if the original predicted data or underlying assumption change.

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Sensitivity analysis is used to assist managers in planning and budgeting.

Sensitivity analysis is a “what if” technique that illustrates the impact of changes from the predicted data.

Two scenarios are being considered for Stylistic Furniture’s (the company from the textbook) budget.

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Responsibility center—a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities.

Responsibility accounting—a system that measures the plans, budgets, actions, and actual results of each responsibility center.

Generally, we consider 4 levels of responsibility center.

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1. Cost—accountable for costs only2. Revenue—accountable for revenues

only3. Profit—accountable for revenues and

costs4. Investment—accountable for

investments, revenues, and costs

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Budgets offer feedback in the form of variances: actual results deviate from budgeted targets.

Variances provide managers with:Early warning of problemsA basis for performance evaluationA basis for strategy evaluation

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Controllability is the degree of influence that a manager has over costs, revenues, or related items for which he or she is being held responsible.

Responsibility accounting helps managers to first focus on whom they should ask to obtain information and not on whom they should blame.

Responsibility accounting focuses on gaining information and knowledge, not only on control.

The fundamental purpose of responsibility accounting is to enable future improvement.

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Budgetary slack is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve.

Stretch targets are targets that are challenging but achievable to focus effort on achieving the targets.

Kaizen Budgeting is a practice whereby each budget process incorporates continuous improvement from past results.

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International companies face significant exchange rate uncertainty rendering budgets for traditional purposes of evaluating a firm’s performance moot but still very useful as a tool to help manager’s adapt plans and coordinate actions when conditions are volatile.

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TERMS TO LEARN PAGE NUMBER REFERENCE

Activity-based budgeting(ABB)

Page 209

Budgetary slack Page 218

Cash budget Page 225

Continuous budget Page 202

Controllability Page 217

Controllable cost Page 217

Cost center Page 216

Financial budget Page 203

Financial planning models Page 213

Investment center Page 216

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TERMS TO LEARN PAGE NUMBER REFERENCE

Kaizen budgeting Page 220

Master budget Page 199

Operating budget Page 203

Organization structure Page 216

Pro forma statements Page 199

Profit center Page 216

Responsibility accounting Page 216

Responsibility center Page 216

Revenue center Page 216

Rolling budget Page 202

Rolling forecast Page 202

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Copyright © 2015 Pearson Education, Inc. All Rights Reserved. 27

Copyright © 2015 Pearson Education, Inc. All Rights Reserved. Master Budget and Responsibility Accounting.

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