Master Budget Notes

3/9/2010 12:56:00 PM

Budgeting involves planning for the various revenue producing and cost generating activities of an organization The important of budgeting is emphasized by an old saying, Failing to plan, is like planning to fail. Budgeting is essentially financial planning, or planning for financial performance. Types of Budgets Appropriation Budget o A maximum amount is established for certain expenditures based on management judgment o Discretionary costs o Example Employee training, advertising, sales promotion and research and development Flexible Budget o A static amount Is established for fixed costs and a variable rate Is determined per activity measure for variable costs y=mx+b o The static amount Includes both discretionary and committed costs while the flexible part Includes engineered costs per x value Capital Budget o Decisions concerning potential investments are made using discounted cash flow techniques o Committed costs Master Budget o A comprehensive plan is developed for all revenue and expenditures o Discretionary, engineered and committed costs The Purposes and Benefits of the Master Budget Integrates and Coordinates o Translates the organizations objectives into action steps Communicates and Motivates o Communicates to employees and managers the expectations of top management Promotes Continuous Improvement Guides Performance o Culminates in the preparation of a set of pro-forma financial statements Facilitates Evaluation and Control o Comparison of budget to actual results

Limitations and Problems Uncertainty o Based on sales forecasts and other assumptions which are difficult to predict Behavior Bias o Should encourage a high level of performance and efficiency, but at the same time, it should be fair and obtainable Costs o Time, effort, computer infrastructure The Sales Budget Forecasted Sales Volume Purchases/Inventory Budget Costs of Goods Sold(COGS) and budgeted ending inventory are generally a function of slaves and you will solves for purchases Beginning Inventory Desired Ending Inventory + Purchases + COGS - Costs of Goods Sold Beginning Inventory = Ending Inventory =Purchases Selling and Administrative Expense Budgets These budgets include all the planned expenditures for selling and general administrative activities Selling expenses are often a function of sales (commission) Many of the expense included in the administrative budget are considered discretionary and are a likely place for spending cuts Managers must be careful not to focus solely on short-term affects when making cuts in these areas Budgeted Income Statement Profit = Total Revenue Variable Cost Fixed Cost Cash Receipts/Collecting Budget Cash sales for the budget period Cash Payments Budget Expenses paid during the budget period o Salary, commission, rent, insurance, etc. Eliminate non-cash expenses such as depreciation and accrued interest Cash Budget Beginning Cash Balance

+Cash Collections Cash Available -Cash Payments =Ending Cash Balance before financing -Minimum c

3/9/2010 12:56:00 PM

3/9/2010 12:56:00 PM