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MANAGERIAL ACCOUNTING

“ Summary: Chapter 10 – Master Budgeting”

Agus Sutiyono (041724353019)


Hesty Tri Budiharti (041724353034)
Ira Tjahyaning Putri (041724353042)

PROGRAM STUDI MAGISTER MANAJEMEN


FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS AIRLANGGA
2018
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for acquiring and using financial and other resources over a
specified forthcoming time period.
1. The act of preparing a budget is called budgeting.
2. The use of budgets to control an organization’s activity is known as budgetary control.

Planning and Control


Planning - involves developing objectives and preparing various budgets to achieve these objectives.
Control - involves the steps taken by taken by management that attempt to ensure j the objectives are
attained.

Advantages of Budgeting
 Budgets communicate management’s plans throughout the organization.
 Budgets force managers to think about and plan for the future.
 The budgeting process provides a means of allocating resources to those parts of the organization
where they can be used most effectively.
 The budget process can uncover potential bottlenecks before they occur.
 Budgets coordinate the activities of the entire organization
 Budgets define goals and objectives

Responsibility Accounting
The premise of responsibility accounting is that managers should be held responsible only for those
items that they can control to a significant extent. Responsibility accounting systems enable
organizations to react quickly to deviations from their plans and to learn from feedback obtained by
comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

Choosing a Budget Period


1. Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year.
Many companies divide their annual budget into four quarters. In this chapter, we focus on one-
year operating budgets.
2. A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as
the current month (or quarter) is completed. This approach keeps managers focused on the future at
least one year ahead.

Bottom-Up versus Top-Down of Budgeting


Bottom-up budgeting
The initial flow of budget data in a bottom up budgeting system is from lower levels of management
to higher levels of management. Each person with responsibility for cost or revenue will prepare his
or her own budget estimates and submit them to the next higher level of management.
Advantages :
1. Individuals at all levels of the organization are viewed as members of the team whose
judgments are valued by top management.
2. Budget estimates prepared by front-line managers are often more accurate than estimates
prepared by top managers.
3. Motivation is generally higher when individuals participate in setting their own goals than
when the goals are imposed from above.
4. A manager who is not able to meet a budget imposed from above can claim that it was
unrealistic. Self-imposed budgets eliminate this excuse.
Top-down budgeting
Top management sets all the key targets for the entire company. These key targets are then move
downwards for the middle and lower-level management to come up with other detailed budgeted
figures.
Advantages :
1. Avoid the potential budgetary slack (budget padding).
2. Provide a clearer performance goals and expectations from the top management.
3. May provide better budget due to top management’s access to privileged/confidential market
and organization information .
4. Provide an efficient budgetary process.

Budget Lapsing
• A popular method among government agencies, universities and organizations relying on allocated
funds.
• Any unused funding at the end of the financial period cannot be carried forward to the following
year.
• As a result, the following year’s budget may be cut because of the under-expenditure in the previous
year.

Incremental versus Zero-Based Budget


• Incremental method of budgeting is most commonly used by companies. Companies start off one
year’s budget by referring back to the previous year’s figures. Adjustments are then made to the
budget to account for the expected changes such as prices for the next year.
• While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s
figures may be carried forward. For example, if all along the organization is over staffed, then the
budget will continually to be allowing for the over staffing situation under this method.
• Zero-Based Budgets are prepared based on the assumption that the company has just started.
Therefore, resources required have to be justified from scratch.
• For example, when budgeting for staff cost for a restaurant, managers using the zero-based
budgeting approach will ignore the existing staff level and expenses, rather, they will examine
factors such as opening hours, number of tables, expected patron numbers to work out the number
of staff required at each position and level, hence the associate costs, to produce a budget.

Top Management Attitude


The success of a budget program depends upon three important factors:
 Top management must be enthusiastic and committed to the budget process, otherwise nobody will
take it seriously.
 Top management must not use the budget to pressure employees or blame them when something
goes wrong. This breeds hostility and mistrust rather than cooperative and coordinated efforts.
 Budget targets should be challenging but achievable in order to have good motivational effects.

The Budget Committee


A standing committee responsible for
 overall policy matters relating to the budget
 coordinating the preparation of the budget
 resolving disputes related to the budget
 approving the final budget

The Master Budget : An Overview


The master budget consists of a number of separate but interdependent budgets. We have developed
this schematic of the budgeting process to illustrate the interdependency of the various individual
budgets.
The sales budget shows the expected sales for the budget period expressed in dollars and units. It is
usually based on a company’s sales forecast. All other parts of the master budget are dependent on the
sales budget.
The production budget is prepared after the sales budget. It lists the number of units that must be
produced during each budget period to meet sales needs and to provide for the desired ending
inventory. The production budget in turn directly influences the direct materials, direct labor, and
manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods
inventory budget. These budgets are then combined with data from the sales budget and the selling
and administrative expense budget to determine the cash budget. The cash budget is a detailed plan
showing how cash resources will be acquired and used over a specified time period. All of the operating
budgets have an impact on the cash budget.
The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.

The Direct Materials Budget


A direct materials budget is prepared after the production requirements have been computed. The
direct material budget details the raw materials that must be purchased to fulfill the production budget
and to provide for adequate inventories.

The Direct Labor Budget


The direct labor budget shows the direct labor hours required to satisfy the production budget, by
knowing in advance how much labor time will be needed throughout the budget year, the company
can develop plans to adjust the labor force as the situation requires.

The Manufacturing Overhead Budget


The manufacturing overhead budget lists all costs of production other than direct materials and direct
labor

The Selling and Administrative Expense Budget


The selling and administrative expense budget lists budgeted expenses for areas other tham
manufacturing. In large organizations, this budget would be a compilation of many smaller, individual
budgets submitted by department head and other persons responsible for selling and administrative
expenses.

The Cash Budget


The preparation of the cash budget can be quite complex. This budget should be broken down into
time periods that are as short as feasible. It consists of four major sections:
1. Cash receipts section lists all cash inflows excluding cash received from financing;
2. Cash disbursements section consists of all cash payments excluding repayments of principal
and interest;
3. Cash excess or deficiency section determines if the company will need to borrow money or if
it will be able to repay funds previously borrowed; and
4. Financing section details the borrowings and repayments projected to take place during the
budget period.

The Budgeted Balance Sheet


The budgeted balance sheet is developed using the data from the balance sheet from the beginning of
the budget period and data contained in the various schedules.

Costs and Benefits of Budgeting


• Budgeting is time-consuming and costly.
• Budgetary slack or padding is an inherent problem of budgeting.
• Despite the drawbacks of budgeting, most companies are still using budgets to plan,
communicate, set objectives and allocate resources etc.
• Since budgets are still commonly used, benefits of budgeting are high and drawbacks of
budgeting can be minimized by having a good budgeting system.
• For a good budgeting system, it is critical to have effective communication and mutual trust
between the top management and its staff.