Types of Budgets master budget
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Transcript Types of Budgets master budget
Types of Budgets
A master budget is a comprehensive set of budgets that
covers all phases of an organization’s operations for a specified
period of time.
Budgeted financial statements (budgeted income
statement, budgeted balance sheet and a budgeted statement
of cash flows) show what an organization’s overall financial
condition is expected to be at the end of the budget period if
operations proceed according to plan.
A capital budget shows planned acquisitions and disposal of
assets, such as land and equipment.
A financial budget outlines how an organization will acquire
financial resources during the budget period.
Budget Planning
The starting point for the master budget is a sales
revenue budget based on forecast sales of services or
goods.
According to the sales budget, a company develops a
set of operational budgets that specify how its
operations will be carried out to meet the demands
for its goods or services.
• Operational budgets encompass a detailed plan for using the
basic factors of production (material, labor and overhead) to
produce a product or provide a service.
Operational: Production Budget
A production budget shows the number of units of services or
goods that are to be produced during a budget period.
Total units to be
produced and sold
+
Desired ending
=
inventory
Total units needed
Expected
Total units needed
- beginning
inventory
=
Units to
be started
Operational: Direct-Material
Budget
A direct-material budget shows the amount of material needed
during a budget period.
Raw material
needed for +
production
Desired ending
raw material
inventory
=
Total raw
materials
needed
Total raw
materials
needed
-
Expected
beginning
raw material
inventory
=
Raw material
to be
purchased
International Aspects of Budgets
A multinational firm’s budget
must reflect the translation of
foreign currency into U.S. dollars.
It is difficult to prepare
budgets when inflation is
high or unpredictable.
Behavioral Impact of Budgets
The human reactions to the budgeting process can
have considerable influence on a company’s overall
effectiveness.
• If a sales manager’s performance is evaluated on the basis
of a sales budget, then he/she has incentive to give a
conservative sales estimate.
• When a supervisor provides a departmental cost projection
for the budget, there is an incentive to overestimate costs.
Padding the budget is the process of building
budgetary slack into a budget by overestimating
expenses and underestimating revenues.
Dealing with Budgetary Slack
A company can avoid relying on the budget as a
negative evaluation tool.
Managers can be given incentives not only to achieve
budgetary projections but also to provide accurate
projections.
• See the article Tie a salesmen’s bonuses to their forecasts by
Jacob Gonik for a comprehensive discussion of dealing with
budgetary slack.