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Master Budgeting

and
Responsibility Accounting

2012 Pearson Prentice Hall. All rights reserved.

Budget Defined
The quantitative expression of a proposed

plan of action by management for a specified


period, and
An aid to coordinating what needs to be done
to implement that plan
May include both financial and nonfinancial
data

2012 Pearson Prentice Hall. All rights reserved.

The Ongoing Budget


Process:

1. Managers and accountants plan the

performance of the company, taking into


account past performance and anticipated
future changes.
2. Senior managers distribute a set of goals
against which actual results will be
compared.

2012 Pearson Prentice Hall. All rights reserved.

The Ongoing Budget


Process:

3. Accountants help managers investigate

deviations from budget. Corrective action


occurs at this point.
4. Managers and accountants assess market
feedback, changed conditions, and their
own experiences as plans are laid for the
next budget period.

2012 Pearson Prentice Hall. All rights reserved.

Strategy, Planning, and


Budgets, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Advantages of Budgets
Provides a framework for judging performance
Motivates managers and other employees
Promotes coordination and communication

among subunits within the company

2012 Pearson Prentice Hall. All rights reserved.

Components of Master
Budgets

Operating budgetbuilding blocks leading to

the creation of the budgeted income


statement
Financial budgetbuilding blocks based on
the operating budget that lead to the creation
of the budgeted balance sheet and the
budgeted statement of cash flows

2012 Pearson Prentice Hall. All rights reserved.

Basic Operating Budget


Steps
1. Prepare the revenues budget.

2. Prepare the production budget (in units).


3. Prepare the direct materials usage budget

and direct materials purchases budget.


4. Prepare the direct manufacturing labor
budget.

2012 Pearson Prentice Hall. All rights reserved.

Basic Operating Budget


Steps

5. Prepare the manufacturing overhead costs


6.
7.
8.
9.

budget.
Prepare the
Prepare the
Prepare the
budget.
Prepare the

ending inventories budget.


cost of goods sold budget.
operating expense (period cost)
budgeted income statement.

2012 Pearson Prentice Hall. All rights reserved.

Basic Financial Budget Steps


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.

2012 Pearson Prentice Hall. All rights reserved.

Sample
Master
Budget,
Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Other Budgeting Issues


Financial-planning software may be

employed to conduct sensitivity (what-if)


analysis to assist in the budgetary process.
Kaizen budgetingincorporating
continuous improvement factors in the
budgeting process.
Activity-based budgetingincorporating
activity-based costing in the budgetary
process.
2012 Pearson Prentice Hall. All rights reserved.

Sensitivity Analysis
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

Furnitures budget for 2012.

2012 Pearson Prentice Hall. All rights reserved.

Budgeting and the Organization:


Responsibility Accounting
Responsibility centera part, segment, or

subunit of an organization whose manager is


accountable for a specified set of activities.
Responsibility accountinga system that
measures the plans, budgets, actions, and
actual results of each responsibility center.

2012 Pearson Prentice Hall. All rights reserved.

Types of Responsibility
Centers
1. Costaccountable for costs only

2. Revenueaccountable for revenues only


3. Profitaccountable for revenues and costs
4. Investmentaccountable for investments,

revenues, and costs

2012 Pearson Prentice Hall. All rights reserved.

Budgets and Feedback


Budgets offer feedback in the form of

variances: actual results deviate from


budgeted targets.
Variances provide managers with:
Early warning of problems
A basis for performance evaluation
A basis for strategy evaluation

2012 Pearson Prentice Hall. All rights reserved.

Controllability
Controllability is the degree of influence that a

manager has over costs, revenues, or related


items for which he is being held responsible.
Responsibility accounting focuses on
information sharing, not in laying blame on a
particular manager.

2012 Pearson Prentice Hall. All rights reserved.

Budgeting and Human


Behavior

The budgeting process may be abused both

by superiors and subordinates, leading to


negative outcomes.
Superiors may dominate the budget process
or hold subordinates accountable for events
they have no control over.
Subordinates may build budgetary slack
into their budgets.

2012 Pearson Prentice Hall. All rights reserved.

Budgetary Slack
The practice of underestimating budgeted

revenues, or overestimating budgeted


expenses, in an effort to make the resulting
budgeted goals (profits) more easily
attainable.

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.

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