CostAccountingSeventeenthEdition,GlobalEditionChapter6MasterBudgetandResponsibilityAccountingCopyright?2021PearsonEducationLtd.LearningObjectives(1of2)6.1Describethemasterbudgetandexplainitsbenefits6.2

Describetheadvantagesofbudgets6.3Preparetheoperatingbudgetanditssupportingschedules6.4

Usecomputer-basedfinancialplanningmodelsforsensitivityanalysis6.5

DescriberesponsibilitycentersandresponsibilityaccountingLearningObjectives(2of2)6.6Recognizethehumanaspectsofbudgeting6.7AppreciatethespecialchallengesofbudgetinginmultinationalcompaniesBudgetDefinedAbudgetisthequantitativeexpressionofaproposedplanofactionbymanagementforaspecifiedperiod.Abudgetisanaidtocoordinatingwhatneedstobedonetoimplementthatplan.Abudgetgenerallyincludes

both

theplan’sfinancialandnonfinancialaspectsandservesasaroadmapforthecompanytofollowinanupcomingperiod.BudgetsHelpManagers….Communicatedirectionsandgoalstodifferentdepartmentsofacompanytohelpthemcoordinatetheactionstheymustpursuetosatisfycustomersandsucceedinthemarketplace.Measureperformancebycomparingfinancialresultsagainstplannedobjectives,activities,andtimelinestolearnaboutpotentialproblems.Motivateemployeestoachievetheirgoals.StrategicPlansandOperatingPlans

(1of2)Budgetingismostusefulwhenitisintegratedwithacompany’sstrategy.Strategyspecifieshowanorganizationmatchesitscapabilitieswiththeopportunitiesinthemarketplacetoaccomplishitsobjectives.StrategicPlansandOperatingPlans

(2of2)Todevelopsuccessfulstrategies,managersmustconsiderquestionssuchasthefollowing:Whatareourobjectives?Howdowecreatevalueforourcustomerswhiledistinguishingourselvesfromourcompetitors?Arethemarketsforourproductslocal,regional,national,orglobal?Whattrendsaffectourmarkets?Howdotheeconomy,ourindustry,andourcompetitorsaffectus?Whatorganizationalandfinancialstructuresserveusbest?Whatarerisksandopportunitiesofalternativestrategiesandwhatareourcontingencyplansifourpreferredplanfails?Strategy,Planning,andBudgetsExhibit6.1Strategy,Planning,andBudgetsBudgetingCycleBeforethestartofafiscalyear,managersatalllevelstakeintoaccountpastperformance,marketfeedback,andanticipatedfuturechangestoinitiateplansforthenextperiod.Seniormanagersgivesubordinatemanagersaframeofreference,asetofspecificfinancialornonfinancialexpectations,againstwhichtheywillcompareactualresults.Managersandmanagementaccountantsinvestigateanydeviationsfromtheplan.WorkingDocument:MasterBudgetThemasterbudgetisatthecoreofthebudgetingprocess.Itexpressesmanagement’soperatingandfinancialplansforaspecifiedperiod.OperatingBudget—Operatingdecisionsonhowtobestusethelimitedresourcesofanorganization.FinancialBudget—Financialdecisionsonhowtoobtainthefundstoacquirethoseresources.AdvantagesofBudgetsBudgetsareanintegralpartofmanagementcontrolsystems.Aswehavediscussedatthestartofthischapter,whenadministeredthoughtfullybymanagers,budgetsdothefollowing:PromotecoordinationandcommunicationamongsubunitswithinthecompanyProvideaframeworkforjudgingperformanceandfacilitatinglearningMotivatemanagersandotheremployeesChallengesinAdministeringaBudgetThebudgetingprocessistime-consuming.Estimatessuggestthatseniormanagersspendbetween10%and20%oftheirtimeonbudgeting,andfinancialplanningdepartmentsspendasmuchas50%oftheirtimeonit.Formostorganizations,theannualbudgetprocessisamonths-longexercisethatconsumesatremendousamountofresources.TimeCoverageofBudgetsThetimelineforabudgetdependsonthemotiveforcreatingthebudget.Themostfrequentlyusedbudgetperiodisoneyear.Businessesmayalsousearollingbudget.Thisbudgetisalwaysavailableforaspecifiedfutureperiod,bycontinuallyaddingamonth,quarter,oryeartotheperiodjustended.FacilitatingtheBudgetingProcess:TheFive-StepDecision-MakingProcessIdentifytheproblemanduncertainties.Obtaininformation.Makepredictionsaboutthefuture.Makedecisionsbychoosingamongalternatives.Implementthedecision,evaluateperformance,andlearn.OperatingBudgetandFinancialBudgetTheoperatingbudgetbeginswiththeRevenuesbudget,includesmultipleschedules,andconcludeswiththeBudgetedIncomeStatement.ThefinancialbudgetismadeupoftheCapitalExpenditurebudget,theCashbudget,theBudgetedBalanceSheet,andtheBudgetedStatementofCashFlows.BasicOperatingBudgetSteps(1of2)Preparetherevenuesbudget(schedule1;thestartingpoint).Preparetheproductionbudget(schedule2;inunits).Preparethedirectmaterialsusagebudgetanddirectmaterialspurchasesbudget(schedule3).Preparethedirectmanufacturinglaborcostsbudget(schedule4).BasicOperatingBudgetSteps(2of2)Preparethemanufacturingoverheadcostsbudget(schedule5).Preparetheendinginventoriesbudget(schedule6A,units;schedule6B,dollars).Preparethecostofgoodssoldbudget(schedule7).Preparethenonmanufacturingcostsbudget(schedule8).Preparethebudgetedincomestatement(Exhibit6-3).BasicFinancialBudgetSteps(Appendix)Basedontheoperatingbudgets,Preparethecapitalexpendituresbudget.Preparethecashbudget.Preparethebudgetedbalancesheet.Preparethebudgetedstatementofcashflows.OverviewoftheMasterBudgetExhibit6.2OverviewoftheMasterBudgetforStylisticFurnitureFinancialPlanningModelsandSensitivityAnalysisFinancialplanningmodelsaremathematicalrepresentationsoftherelationshipsamongoperatingactivities,financingactivities,andotherfactorsthataffectthemasterbudget.Sensitivityanalysisisa“what-if”techniquethatexamineshowaresultwillchangeiftheoriginalpredicteddataarenotachievedorifanunderlyingassumptionchanges.SensitivityAnalysis(1of2)Sensitivityanalysisisusedtoassistmanagersinplanningandbudgeting.Sensitivityanalysisisa“what-if”techniquethatillustratestheimpactofchangesfromthepredicteddata.Inthenextslide,twoscenariosarebeingconsideredforStylisticFurniture’sbudget.SensitivityAnalysis(2of2)Exhibit6.4EffectsofChangesinBudgetAssumptionsBudgetingandResponsibilityAccounting(1of3)Howeachcompanystructuresitsorganizationsignificantlyshapeshowitcoordinatesitsactions.Functionalorganizationsdevelopstrongcompetencieswithineachfunctionbutaregenerallylessfocusedonparticularmarketsorcustomers.Firmsthatareorganizedbyproductlineorbrandaremorefocusedonparticularmarketsorcustomers.BudgetingandResponsibilityAccounting(2of3)Eachmanager,regardlessoflevel,isinchargeofaresponsibilitycenter.Aresponsibilitycenterisapart,segment,orsubunitofanorganizationwhosemanagerisaccountableforaspecifiedsetofactivities.Responsibilityaccountingisasystemthatmeasurestheplans,budgets,actions,andactualresultsofeachresponsibilitycenter.Therearefourtypesofresponsibilitycenters.BudgetingandResponsibilityAccounting(3of3)FourtypesofresponsibilitycentersCost—accountableforcostsonlyRevenue—accountableforrevenuesonlyProfit—accountableforrevenuesandcostsInvestment—accountableforinvestments,revenues,andcostsBudgetsandFeedbackBudgets,coupledwithresponsibilityaccounting,providefeedbacktotopmanagersabouttheperformancerelativetothebudgetofdifferentresponsibilitycentermanagers.Budgetsofferfeedbackintheformofvariances:

Actualresultsdeviatefrombudgetedtargets.VariancesprovidemanagerswithEarlywarningofproblemsAbasisforperformanceevaluationAbasisforstrategyevaluationResponsibilityandControllability(1of2)Controllabilityisthedegreeofinfluenceaspecificmanagerhasovercosts,revenues,orrelateditemsforwhichheorsheisresponsible.Acontrollablecostisanycostprimarilysubjecttotheinfluenceofagivenresponsibilitycentermanagerforagivenperiod.Responsibilityaccountinghelpsmanagerstofirstfocusonwhomtheyshouldasktoobtaininformationandnotonwhomtheyshouldblame.ResponsibilityandControllability(2of2)Responsibilityaccountingfocusesongaininginformationandknowledge,notonlyoncontrol.Thefundamentalpurposeofresponsibilityaccountingistoenablefutureimprovement.Performancereportsforresponsibilitycentersaresometimesdesignedtochangemanagers’behaviorinthedirectiontopmanagersdesireevenifthereportsdecreasecontrollability.HumanAspectsofBudgeting(1of2)Whydowediscussthemasterbudgetandresponsibilityaccountinginthesamechapter?Primarilytoemphasizethathumanfactorsarecrucialinbudgeting.Toooften,budgetingisthoughtofasamechanicaltoolbecausethebudgetingtechniquesthemselvesarefreeofemotion.However,theadministrationofbudgetingrequireseducation,persuasion,andintelligentinterpretation.HumanAspectsofBudgeting(2of2)Budgetaryslackisthepracticeofunderestimatingbudgetedrevenuesoroverestimatingbudgetedcoststomakebudgetedtargetseasiertoachieve.Stretchtargetsarechallengingbutachievablelevelsofexpectedperformance,intended