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Master Budget
Budgeting
Objectives
Executing plans to achieve goals
Periodically comparing actual results with the goals
Establishing specific goals
Functions
Planning
goals
Directing
decisions and actions
Controlling
performance
Systems
Budgetary period lasts a fiscal year
Continuous budgeting
variation of fiscal year
12-month budget continually updated replacing the data for the ended month for the next year data
Zero-based budgeting
Requires the estimation of operating data (sales, production, etc) as if operations are being started for the first time
Two Major Budgets
static budget
expected results for only one activity level
used mostly by service companies, government entities and some manufacturing functions of companies
flexible budget
expected results for several activity levels
series of static budgets for different levels of activity
since it adjusts for changes in the activity level, it's more accurate and useful than the static budget
Key Points
Master Budget
Integrated set of operating and financial budgets for a period of time
prepared yearly
Types
Operating budgets
for preparing a budgeted income statement
Financial budgets
used to prepare the budgeted balance sheet
Financial Budget
Cash Budget
Collection Schedules
(inflows)
Estimated cash receipts: from cash sales and collections account
Cash receipts can be obtained from plans to issue equity, debt financing or interest revenue
Used to obtain the estimates for cash receipts from cash sales and collections on account
Budgeted cash collected
sum of the cash collected from the previous month’s sales and the cash collected from the current month’s sales
Cash Payment Schedules
(outflows)
Used to estimate the cash payments for manufacturing costs
They must be budgeted for operating costs and expenses
Examples
planned for capital expenditures, dividends, interest payments, or long-term debt payments
Budgeted cash payment
sum of the previous month’s manufacturing costs paid cash (less depreciation) and current month’s manufacturing costs paid cash (less depreciation)
estimates the expected receipts and payments of cash for a period of time.
Capital Expenditures Budget
It is a summary of fixed assets acquisition plans
Prepared usually for five to ten year periods into the future
Bigger timeframe because fixed assets often must be ordered years in advance
Budgeted Balance Sheet
Prepared using operating and financial budgets
Uses estimated amounts for its elaboration
Has the date of the end of the budget period
It reflects the financing and investing activities of the company.
Nonmanufacturing Staffing Budgets
Primary budget comprising labor or staffing
Highly flexible to service needs and is used to plan and manage staffing levels
Operating Budget
Direct Labor Cost Budget
Gives the estimated direct labor hours and related costs to achieve budgeted production
Calculation
Budgeted direct labor hours:
budgeted production volume x hour quantity expected per unit
Total direct labor cost:
direct labor hours required x hurly rate
Factory Overhead Cost Budget
Sometimes supported by
departmental schedules:
separation between fixed and variable factory overhead costs
Estimates costs of factory overhead per item used for the budgeted production
Direct Materials Purchases Budget
Determines estimated quantities of direct materials to purchase needed to meet expected production and inventory levels
Calculation
Needed budgeted direct material:
Budgeted production volume x Direct material quantity per unit
Total direct materials to be purchased:
materials required for production + desired ending inventory - desired beginning inventory
Budgeted direct materials to be purchased:
total direct material quantity x Unit price to be purchased
Production Budget
It estimates the number of units to be manufactured to achieve budgeted sales and expected inventory level goals
We need the expected units to be sold, desired units in ending inventory and estimated units in beginning inventory.
Selling and Admin. Expenses Budget
Uses sales budget as starting point
Normally supported by departmental schedules
total selling expenses + total administrative expenses
Sales Budget
Expected sales volume
Estimate of the quantity of sales by using the prior year sales as starting point
Revised for factors of planned advertising and promotions, projected pricing changes, and expected industry and general economic conditions
Budgeted sales revenue
Expected sales volume
x
Expected unit sales price
Cost of Goods Sold Budget
Gathers data from estimated cost budgets mainly direct material purchases, direct labor cost and factory overhead cost
Includes estimated desired inventories for direct materials, work in process and finished goods
Gives as result the total budgeted cost of goods estimated to be sold
Budgeted Income Statement
Allows management to see the effects of estimated sales, costs, and expenses over expected profits for the year and have a metric to track goal achievement through performance
Summarizes
sales budget
,
COGS budget
and
selling and administrative expenses budget
, combined with
estimates of other income
,
expenses
and
income tax
Includes all budgeted operating activities of a company
References
Warren, C. S., Jones, J. P., Tayler, P. D. C. M. A., PhD, & William B. Tayler, P. D. C. M. A. (2018). Financial & Managerial Accounting (15.a ed.). Cengage Learning.
