CHAPTER 6

Master Budgeting
and
Responsibility Accounting
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-2
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-3
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-4
 Advantages of Budgets
 Provides a framework for judging
performance
 Motivates managers and other employees
 Promotes coordination and communication
among subunits within the company

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-5
 Components of Master Budgets
 Operating Budget – building blocks leading to
the creation of the Budgeted Income
Statement
 Financial Budget – building blocks based on
the Operating Budget that lead to the creation
of the Budgeted Balance Sheet and the
Budgeted Statement of Cash Flows

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-6
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-7
 Basic Operating Budget Steps
5. Prepare the Manufacturing Overhead Costs
Budget
6. Prepare the Ending Inventories Budget
7. Prepare the Cost of Goods Sold Budget
8. Prepare the Operating Expense (Period
Cost) Budget
9. Prepare the Budgeted Income Statement

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-8
 Budgeting and the Organization:
Responsibility Accounting
 Responsibility Center – a part, segment, or
subunit of an organization whose manager is
accountable for a specified set of activities
 Responsibility Accounting – a system that
measures the plans, budgets, actions, and
actual results of each Responsibility Center

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-9
 Types of Responsibility Centers
1. Cost – accountable for costs only
2. Revenue – accountable for revenues only
3. Profit – accountable for revenues and costs
4. Investment – accountable for investments,
revenues, and costs

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-10
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-11
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-12
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 6-13
CHAPTER 6

THE END