Master Budget

7/17/2019 Master Budget

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PROJECT REPORT

ON

MASTER BUDGET.

MASTER OF COMMERCE

ACCOUNTANCY

PART I (SEMESTER-I)

(2015-2016)

INTERNA ASSESSMENT

AD!ANCE COST ACCOUNTING

SUBMITTED BY"-

NIMES# MA#IDA

RO NO"-2$

%. J. SOMAIYA COEGE OF ARTS & COMMERCE

!IDYA!I#AR (EAST)

AFFIIATED TO UNI!ERSITY OF MUMBAI

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%. J. SOMAIYA COEGE OF ARTS & COMMERCE

!IDYA!I#AR (EAST)

CERTIFICATE

(2015-2016).

This is to certify that the project entitled MASTER BUDGET is a

project work done by MASTER NIMES# MA#IDA' RO NO"-2$ in

fulfillment of the requirements for the MCOM ACCOUNTANCY (PART-I)

(SEMESTER-I)during the academic year 2015-2016is the original work done

of the candidate and completed under guidance of CA %INJA JOTA

D*+,: -

P*,: - MUMB!

""##""""" ##"""""""

I+,/* E*,/ E+,/* E*,/

""""""""" """"""""

$Mrs# %onali &eogirikar' $&r# %U&( )*%)

MCOM C/3*+/ P/4*

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DECARATION BY STUDENT

!' NIMES# MA#IDA, RO NO"-2$, the student of MCOM

ACCOUNTANCY (P*/+-I) (SEMESTER-I) (2015-2016)hereby declares that !

hae completed the project on MASTER BUDGET under the superision of

the internal guidance of CA. %INJA JOTA#

The information submitted is true and original to best of my knowledge#

Thank you,

*ours faithfully,

.!M/%( M(!&

022 .:-+3

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AC%NOEDGEMENT

! would like to thank all the people who helped me in undertaking the study andcompleting the project, by imparting me with aluable information and guidance

that was required at eery stage of my project work#

! would like to thank our principal, D/.SUD#A !YASand M5M

5o-ordinate, for giing me an opportunity and encouragement to prepare the

project#

2ast but not the least, ! would like to thanks my project guide CA

%INJA JOTAfor guiding and helping me throughout the preparation of my

project, right from selection of the topic till its completion#

NIMES# MA#IDA

RO NO"-2$

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DEFINATION OF MASTER BUDGET"-

The master budget is the aggregation of all lower-leel budgets produced by acompany7s arious functional areas, and also includes budgeted financialstatements, a cash forecast, and a financing plan#

The master budget is typically presented in either a monthly or quarterly format,or usually coers a company7s entire fiscal year# n e8planatory te8t may beincluded with the master budget, which e8plains the company7s strategicdirection, how the master budget will assist in accomplishing specific goals, andthe management actions needed to achiee the budget#There may also be a discussion of the headcount changes that are required toachiee the budget#

master budget is the central planning tool that a management team uses todirect the actiities of a corporation, as well as to judge the performance of itsarious responsibility centers#!t is customary for the senior management team to reiew a number of iterationsof the master budget and incorporate modifications until it arries at a budget thatallocates funds to achiee the desired results#(opefully, a company uses participatie budgeting to arrie at this final budget,

but it may also be imposed on the organi9ation by senior management, with littleinput from other employees#

or instance, eery company has a group of employees in charge of theadministratie duties within the company# !f a company was purchased, therewould no need to keep two sets of administratie staff#The management of the acquiring company would hae to make a decision thatshould be let go# Management can also use the master budget for e8pansion

planning# or instance, a machine shop should consider current cash flows,current loan rates, current debt limits, and future e8pected sales beforemanagement plans a large e8pansion#

The master budget is the primary financial planning mechanism for anorgani9ation and also proides the foundation for a traditional financial controlsystem# More specifically, it is a comprehensie integrated financial plandeeloped for a specific period of time, e#g#, for a month, quarter, or year#This is a much broader concept than the first three types of budgeting#The master budget includes many appropriation budgets $typically in theadministratie and serice areas' as well as fle8ible budgets, a capital budget andmuch more#

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FUNCTIONS OF MASTER BUDGET"

SUM OFA #OES"-

master budget must add all the budgets together to get one bottom line# Thismaster budget, in turn, is used to determine the oerall reenue and e8penses ofan organi9ation and its profitability# This helps the higher-ups know e8actly howmuch they are spending on running the business#

DI!ISIONS"-

master budget must also list all separate budgets#


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DEPARTMENTA CONTRO"-

Breaking the master budget into sub-budgets gies full responsibility fordepartmental budgets oer to the appropriate departments# The idea of

responsibility accounting -- which asserts that indiiduals should only be heldaccountable for results that they can control -- allows managers to controlemployees that feel reasonable for their actions# ccording to the te8tbook?Managerial accounting,? this could lead to increased productiity#

BUDGETED FINANCIA STATEMENT"-

The final output of the master budget is a set of budgeted financial statements#Because the output of the master budgeting process is a report that is familiar to

top management, company decision-makers can determine how the company7sfinancials would look if the budget objecties were attained# 5ompany controland processes can then be changed and updated to ensure that financial objectiesare achieed#

SAES AARENESS"-

The master budget begins with sales forecasts, which reinforces the idea thatwithout customers a business will hae a difficult time succeeding, regardless ofwhat happens down the production line# or employees that are far remoed fromthe sales function, this is a releant reminder of how customers affect the

business#

SECTIONS"-

The master budget is broken down in terms of the departments, so the reader canlook at specific departments for financial information, if required# Under each

department, there will be common headings, such as operational budgets,production fees, total sales or earnings for the department, cash flow statementsand income statements for the department and a full balance sheet that presentsthe department7s earnings and spending for a gien period#

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diagram illustrating the arious parts of a master budget is presented in /8hibit3-6#

The master budget has two major parts including the operating budget and thefinancial budget $%ee /8hibit 3-6'# The operating budget begins with the sales

budget and ends with the budgeted income statement# The financial budgetincludes the capital budget as well as a cash budget, and a budgeted balance sheet#The main focus of this chapter is on the arious parts of the operating budget andthe cash budget# The budgeted balance sheet is coered briefly, but notemphasi9ed# detailed discussion of capital budgeting and inestmentmanagement#

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T#E PURPOSES OF T#E MASTER BUDGET

There are a ariety of purposes and benefits obtained from budgeting# 5onsiderthe following:-

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The master budget is the major planning deice for an organi9ation# Thus, it isused to integrate and coordinate the actiities of the arious functional areaswithin the organi9ation# or e8ample, a comprehensie plan helps ensure that allthe needed inputs $equipment, materials, labor, supplies, etc#' will be at the right

place at the right time when needed, just-in-time if possible# !t also helps insurethat manufacturing is planning to produce the same mi8 of products thatmarketing is planning to sell# The idea is that the products should be pulledthrough the system on the basis of the sales budget, rather than producedspeculatiely and pushed on the sales force# s discussed in 5hapter A, e8cessinentory and other resources hide problems and add unnecessary costs#

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nother purpose and benefit of the master budget is to proide a communicationdeice through which the company=s employees in each functional area can seehow their efforts contribute to the oerall goals of the organi9ation# This

communication tends to be good for morale and enhance jobs satisfaction# eopleneed to know how their efforts add alue to the organi9ation and its7 products andserices# The behaioral aspects of budgeting are e8tremely important#

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The planning process encourages management to consider alternaties that mightimproe customer alue and reduce costs# 0ecall that ?lan? is the first step inthe %hewhart-&eming plan- do-check-action continuous improement cycle# The&5 cycle supports specific improements in the company=s processes# Thefinancial plan and subsequent financial performance measurements reflect thefinancial e8pectations and consequences of those efforts#

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The master budget also proides a guide for accomplishing the objectiesincluded in the plan# The budget becomes the basis for the acquisition andutili9ation of the arious resources needed to implement the plan# erfection ofthe guidance aspect of budgeting can significantly reduce the amount of

uncertainty and ariability in the company=s operations# !n a

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The master budget proides a method for ealuating and subsequently controllingperformance# Ce will deelop this idea in considerable detail in the followingchapter# erformance ealuation and control is a ery powerful and ery

controersial aspect of budgeting#

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BENEFITS OF MASTER BUDGET

MOTI!ATION"-

nother purpose and benefit of the master budget is to proide a communicationdeice through which the company=s employees in each functional area can seehow their efforts contribute to the oerall goals of the organi9ation# Thiscommunication tends to be good for morale and enhance jobs satisfaction# eopleneed to know how their efforts add alue to the organi9ation and its7 products andserices# The behaioral aspects of budgeting are e8tremely important#

O!ERA BUSINESS BUDGET"-

ne of the main reasons why a master budget is created is to gie the businessowner and company e8ecuties an oeriew of the company7s budget# %incesmaller budgets for each department only coer the e8penses and earnings foreach indiidual area of the business, a company e8ecutie would hae to add allof the departments7 budgets up to get one large budget to determine the oerallearnings and spending of the company# The master budget reeals how much thecompany is earning and spending as a whole and shows whether the business isin good or negatie financial standing#

PANNING A#EAD"-

nother adantage of haing a master budget is the ability to identify problemsand plan ahead# or e8ample, the master budget can reeal if one department isspending beyond its limit, causing the company to spend more than it is earningeach month# !n order to repair this budget issue, company e8ecuties can identifywhich department is spending e8cessiely by looking at indiidual department

budgets and plan ahead, either by cutting the department7s e8penses or by makingother budget cuts in other departments for additional spending# !t is more difficult

to spot budget issues by only looking at indiidual department budgets#

GOA AC#IE!EMENT"-

!n a thorough budgeting system, you set short-term, medium-term and long-termfinancial goals# *our goals direct you in allocating portions of income to payingoff debt and putting money away for saings or retirement# Using accuratenumbers to reflect cash inflows and required e8penses allows for greater

understanding of the time required to meet financial milestones# !n theory,accurate accounting and disciplined focus should propel you toward eachfinancial goal you set#

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PANNING FOR UNE;PECTED"-

Budgeting puts great emphasis on the known factors of income and typicale8penses# (oweer, a primary benefit of budgeting is that you can equip yourself

to deal with une8pected e8penses# The ideal budget allows you to set somemoney aside each month in a rainy-day saings fund# Building such a fund isessential after you meet monthly bill obligations# Chen you need a new set oftires or a home appliance breaks down, the rainy- day fund is your way to pay forthese unplanned eents without taking on debt#

SIMPICITY"-

5ash budgets are relatiely easy to use# nce you hae established the totalamount of cash aailable for spending and decided how to allocate it, you canlook at the cash left in your wallet and see at a glance when you are reachingyour spending limit# To see where your money is going, all you hae to do istrack your receipts#

INTEGRATES AND CORDINATES"-

The master budget is the major planning deice for an organi9ation# Thus, it isused to integrate and coordinate the actiities of the arious functional areas

within the organi9ation# or e8ample, a comprehensie plan helps ensure that allthe needed inputs $equipment, materials, labor, supplies, etc#' will be at the right

place at the right time when needed, just-in-time if possible# !t also helps insurethat manufacturing is planning to produce the same mi8 of products thatmarketing is planning to sell# The idea is that the products should be pulledthrough the system on the basis of the sales budget, rather than producedspeculatiely and pushed on the sales force# s discussed in e8cess inentory andother resources hide problems and add unnecessary costs# The integratie natureof the budget proides a way to implement the lean enterprise concepts of just-in-

time and the theory of constraints where the emphasis is placed on theperformance of the total system $organi9ation' rather than the arious subsystemsor functional areas#

IMITATIONS AND PROBEMS

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There are seeral limitations and problems associated with the master budget that needto be considered by management# These problems inole uncertainty, behaioral biasand costs#

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third problem or limitation is that budgeting requires a considerable amount oftime and effort# Many companies maintain a twele month budget on a

continuous basis by adding a future month as the current month e8pires# Chilethis does not create a major e8penditure for large or medium si9ed organi9ations,smaller companies may find it difficult to justify the costs inoled# Many small,

potentially profitable firms do not plan effectiely and eentually fail as a result#5ash flow problems are common, e#g#, not haing enough cash aailable $oraccessible through a line of credit with a bank' to pay for merchandise or rawmaterials or to meet the payroll# Many of these problems can be aoided by

preparing a cash budget on a regular basis#

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Typically, the following simplifying assumptions are made when preparing a masterbudget: 1#' sales prices are constant during the budget period, +#' ariable costs per unitof output are constant during the budget period, 4#' fi8ed costs are constant in total and6#' sales mi8 is constant when the company sells more than one product# Theseassumptions facilitate the planning process by remoing many of the economic

comple8ities# The oerall effects of these simplifications are illustrated graphically in/8hibit 3-;# !nstead of planning on the basis of the more complicated non-linear modelon the left, the master budget is ery similar to the more easily understood linear modelon the right# where the illustrations in /8hibit 3-; are deeloped and e8plained# !naddition, a practical approach for analy9ing the differences between budgeted andactual sales prices, unit cost, sales mi8 and sales olume# or now, think of /8hibit 3-;as a preiew of those future topics#

MAJOR COMPONENTS OF MASTER BUDGET

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master budget is the financial document used for projecting the income and e8penses of acompany, as opposed to a diision, product, or other area of a business# rom the master

budget, a small-business owner can deelop a ariety of reports to help set specific goalsfor the business# The major components of a master budget include income and e8penses,oerhead and production costs, and the monthly, annual, aerage, and projection totals# The

following e8plained are the major components of master budget gien below but MasterBudget has two types of components i#e# perational Budget and inancial Budget#0eenues Budget roduction Budget &irect Manufacturing 2abor 5osts Budget /nding!nentory Budget Manufacturing erhead 5osts Budget &irect Materials 5osts Budget5ost of Foods %old Budget perating /8pense Budget Budgeted !ncome %tatement5apital /8penditures Budget 5ash Budget Budgeted Balance %heet Budgeted %tatement of5ash lows perating Budget inancial Budget#

1.SAES BUDGET

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&eeloping a sales budget inoles the following calculations:

Budgeted %ales G H $Budgeted Unit %ales'$Budgeted %ales rices'

5urrent eriod 5ash 5ollections H 5urrent eriod 5ash %ales I 5urrent

eriod 5redit %ales 5ollected in 5urrent eriod I rior eriod 5redit %ales5ollected in 5urrent eriod

These calculations are relatiely simple, but where does the budget directorobtain this informationJ Cell, sales forecasting is a marketing function# %alesestimates are frequently generated by the company7s sales representaties whodiscuss future needs with customers $wholesalers and retailers'# %tatisticalforecasting techniques can also be used to make estimates of e8pected futuresales, considering the company7s preious sales performance and arious

assumptions about the future economic climate, and the actions of competitorsand consumers# ricing is also a marketing function, but many prices are basedon costs plus a markup $the supply function' and consideration of whatconsumers are willing and able to pay for the product $the demand function'#Thus, the budgeted sales price is usually determined after the budgeted unit costhas been calculated $see >b# below'#

The information needed to deelop an equation for collections is proided by thefinance department and is normally based on past e8perience# These calculationsare somewhat more inoled than they appear to be in the equation aboe

because of the effects of cash discounts and the time lags between credit salesand collections# 5ash discounts are frequently used to speed up cash inflows#This puts the funds back to work sooner and reduces the need for short termloans# (oweer, een with a generous cash discount for prompt payment,collections for credit sales are typically spread out oer seeral months# Thee8amples illustrated below proide some of the possibilities#

2.PRODUCTION BUDGET

reparing a production budget includes consideration of the desired inentorychange as follows:

Units to Be roduced H Budgeted Unit %ales $from 1' I &esired /ndinginished Foods - Beginning inished Foods

The desired ending inentory is usually based on the ne8t periods sales budget#5onsiderations inole the time required to produce the product, $i#e#, cycle timeor lead time' as well as setup costs and carrying costs# !n a just-in-timeenironment the desired ending inentory is relatiely small, or theoretically9eros in a perfect situation# !n the e8amples and problems in this chapter, the

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ending finished goods inentory is stated as a percentage of the ne8t period7s$month7s' unit sales#

?.DIRECT MATERIA BUDGET

The direct materials budget includes fie separate calculations#

a# Kuantity of Material .eeded for roduction H $Units to be roduced'$Kuantity of Material Budgeted per Unit'

The quantity of material required per unit of product is determined by theindustrial engineers who designed the product# Materials requirements arefrequently described in an engineering document referred to asa ?bill ofmaterials?#

b# Kuantity of Material to be urchased H Kuantity of Material .eeded forroduction I &esired /nding Material - Beginning Material

This calculation is more inoled than equation 4b appears to indicate because itincludes information for two future periods# The desired ending materialsquantity is normally based on the ne8t period7s $month7s' materials needed for

production and this amount depends on the third period7s budgeted unit sales# fcourse inentories of raw materials $just like finished goods' are kept to aminimum in a

leels include the reliability of the company7s suppliers, as well as ordering andcarrying costs#

c# Budgeted 5ost of Material urchases H $Kuantity of Material to beurchased'$Budgeted Material rices'

This amount is needed to determine cash payments# nce the quantity to bepurchased has been determined, the cost of purchases is easily calculated#Budgeted material prices are proided by the purchasing department#

d# 5ost of Material Used H $Kuantity needed for roduction'$BudgetedMaterial rices'

The cost of materials used is needed in the cost of goods sold budget below#

e# 5ash ayments for &irect Material urchases H 5urrent eriod urchasesaid in 5urrent eriod I rior eriod urchases aid in 5urrent eriod

The information needed to determine budgeted cash payments is proided by

accounting, $accounts payable' and is usually based on past e8perience# .ormallythe budget should reflect a situation where the company pays promptly to takeadantage of all cash discounts allowed, thus 4e may be equal to 4c#

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@# DIRECT ABOR BUDGET

ewer calculations are needed for direct labor than for direct materials becauselabor hours cannot be stored in the inentory for future use# Time can be wasted,

but not postponed#

a# &irect 2abor (ours .eeded or roduction H $Units to be roduced'$# (ours Budgeted per Unit'

The amount of direct labor time needed per unit of product is determined byindustrial engineers# /stimates are frequently made using a technique referred toas motion and time study# This inoles measuring each moement required to

perform a task and then assigning a precise amount of time allowed for thesemoements# The cumulatie time measurements for the arious tasks required to

produce a product proide the estimate of a standard time per unit# There arealternatie techniques that are less e8pensie, but motion and time study proidesestimates that are ery precise# 2earning cures proide another quantitatietechnique that is helpful in establishing labor standards#

b# Budgeted &irect 2abor 5ost H $# (ours needed for roduction'$Budgeted 0ates er (our'

The budgeted rates per hour for direct labor are proided by the human resourcedepartment# requently the labor $union' contract proides the source for this

information# Many different types of labor may be required with different leelsof e8pertise and e8perience# Thus, /quations 6a and 6b may include seeralcalculations#

5# T#E FACTORY O!ER#EAD BUDGET

The factory oerhead budget is based on a fle8ible budget calculation asdescribed# More specifically, the calculation is as follows:

a# Budgeted actory erhead 5osts H Budgeted i8ed erhead I$Budgeted )ariable erhead 0ate'$# (ours needed for roduction from6a'

This is a cumulatie equation that combines the equations for the company7sarious types of indirect resources# This same idea was illustrated in 5hapter 6when introducing predetermined oerhead rates# The calculation for cash

payments reflects one of the differences between cash flows and accrualaccounting# %ince some costs, like depreciation, do not inole cash payments inthe current period, these costs must be subtracted from the total oerhead costs to

determine the appropriate amount#

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b# 5ash ayments for erhead H Budgeted actory erhead 5ost -&epreciation and other costs that do not require cash payments

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lthough budgeted factory oerhead costs can be calculated in the mannerpresented aboe, there is an alternatie approach that illustrates the differencebetween budgeted and standard costs# Budgeted factory oerhead costs can becalculated by determining the standard factory oerhead costs and then adjustingfor the planned production olume ariance# The planned production olumeariance is similar to the capacity $or idle capacity' ariance illustratedin 5hapter 6# !t is the difference between the denominator inputs used to calculatethe oerhead rates, i#e#, direct labor hours in our e8ample, and the budgeted directlabor hours needed for production, multiplied by the budgeted fi8ed oerhead

rate#

The alternatie calculation for factory oerhead costs is:

Budgeted factory oerhead costs H $Total budgeted oerhead rate per hour'$# hours needed for production from 6a'I Unfaorable planned production olume ariance or - aorable planned

production olume ariance

Multiplying the total oerhead rate by the number of direct labor hours needed

for production proides the standard or applied oerhead costs# (oweer, if thenumber of direct labor hours needed for planned production $i#e#, budgeted hours'is not equal to the number of hours used to calculate the oerhead rates $i#e#,denominator hours', then standard fi8ed oerhead costs will not be equal to

budgeted fi8ed oerhead costs# The difference is the planned production olumeariance# This is illustrated graphically in igure 3-1#

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%ince the difference is caused by the way fi8ed oerhead costs are treated, it canbe illustrated by comparing standard fi8ed oerhead costs with budgeted fi8edoerhead costs# igure 3-1 shows that if planned or budgeted hours $B(1' areless than denominator hours $&(', the planned production olume ariance$))' is unfaorable and represents under applied fi8ed oerhead# (oweer, if

planned or budgeted hours $B(+' are greater than denominator hours $&(', thenthe planned production olume ariance $))' is faorable and represents oerapplied fi8ed oerhead#

The difference between budgeted and standard total factory oerhead costs can beillustrated by simply adding ariable oerhead costs to the graph# %ince budgetedand standard ariable oerhead costs are always equal at any leel of production,the difference between standard and budgeted total oerhead costs is the same asthe difference between standard and budgeted fi8ed oerhead costs# The

difference is the planned production olume ariance# This is illustrated in igure3-+

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t any particular leel of production, e#g#, 1,DDD hours, budgeted and standardariable oerhead costs are always equal# (oweer, budgeted and standard fi8edoerhead costs are only equal when the budgeted hours planned for the month are

equal to the denominator hours used to calculate the oerhead rates#

The difference between the budgeted hours planned and the denominator hours,multiplied by the fi8ed oerhead rate is the difference between budgeted andstandard fi8ed oerhead costs as well as the difference between budgeted andstandard total oerhead costs#

Chen working with a budget this difference is referred to as the plannedproduction olume ariance#

The dollar amount for the ending inentory of finished goods is needed below todetermine cost of goods sold# The dollar amounts for ending direct materials andfinished goods are needed for the balance sheet#

a# /nding &irect Materials H $&esired /nding Materials from 4b'$Budgetedrices'

b# Budgeted or %tandard Unit 5ost H $Kuantity of M# required per Unit'$Budgeted rices' I $# (ours required per Unit'$Budgeted 0ate'

I $Total erhead 0ate'$# (ours required per Unit'

The budgeted or standard unit cost can be calculated at any time after thebudgeted quantities per unit and input prices are obtained# The calculation isplaced here because it is needed for >c#

c# /nding inished Foods H $&esired /nding inished Foods from +'$Budgeted Unit 5ost'

6# ENDING IN!ENTORY BUDGET

The dollar amount for the ending inentory of finished goods is needed below todetermine cost of goods sold# The dollar amounts for ending direct materials andfinished goods are needed for the balance sheet#

a# /nding &irect Materials H $&esired /nding Materials from 4b'$Budgetedrices'

b# Budgeted or %tandard Unit 5ost H $Kuantity of M# required per Unit'

$Budgeted rices' I $# (ours required per Unit'$Budgeted 0ate'I $Total erhead 0ate'$# (ours required per Unit'

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The budgeted or standard unit cost can be calculated at any time after thebudgeted quantities per unit and input prices are obtained# The calculation isplaced here because it is needed for >c#

c# /nding inished Foods H $&esired /nding inished Foods from +'

$Budgeted Unit 5ost'

# COST OF GOODS SOD BUDGET

5ost of goods sold is needed for the income statement# ne method ofdetermining budgeted 5F% inoles accumulating the amounts from the

preious sub-budgets as follows#

a# Budgeted Total Manufacturing 5ost H 5ost of &irect Material Used $from4d#' I 5ost of &irect 2abor Used $from 6b#'I Total actory erhead 5osts $from ;a#'

b# Budgeted 5ost of Foods %old H Budgeted Total Manufacturing 5ost$from @a#' I Beginning inished Foods $from preious ending or calculatefrom + and >b' - /nding inished Foods $from >c or calculate from + and>b'

This is the same approach used in 5hapter + to determine cost of goods sold, butwhen deeloping a budget we typically assume no change in Cork in rocess#

Therefore, budgeted cost of goods manufactured is equal to budgeted cost ofgoods sold#

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Budgeted cost of goods sold can also be calculated by determining standard costof goods sold, and then adjusting for the planned production olume ariance#The alternatie calculation for cost of goods sold is:

Budgeted 5ost of Foods %old H $Budgeted unit sales'$Budgeted unit cost'I Unfaorable planned production olume arianceor - aorable planned production olume ariance

lthough budgeted unit cost equals standard unit cost, budgeted cost of goodssold is not equal to standard cost of goods sold# gain, the difference betweenstandard and budgeted costs is the production olume ariance# There are tworeasons to become familiar with this alternatie# irst, it helps strengthen yourunderstanding an important concept that appears again in subsequent chapters,e#g#, 5hapters 1D and 1+# second reason is that the alternatie approach

proides a much faster way to calculate budgeted cost of goods sold# Therefore it

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can be used as a stand alone method, or as a way to check the accuracy of yourcalculations in @a and b#

*ou may wonder why a company would plan a production olume ariance inthe budget# This occurs because the denominator actiity for a particular month is

normally the aerage monthly production based on one twelfth of the plannedproduction for the entire year#

.SEING & ADMINISTRATI!E E;PENSE BUDGET

The preparation of the selling and administratie e8pense budgets is ery similarto the approach used for factory oerhead#

a# Budgeted %elling and dministratie /8penses H Budgeted i8ed %ellingL dministratie /8penses I $Bud )ariable 0ate as a roportion of %ales G'$Budgeted %ales G'

b# 5ash ayments for %elling L dministratie /8penses H Budgeted%elling L dministratie /8penses - &epreciation and other cost which donot require cash payments

lthough we will place less emphasis on this part of the master budget, $mainlyto simplify the illustrations' these costs are usually significant# lso rememberthat many appropriation budgets $treated as fi8ed costs' may be included,

particularly for certain administratie costs#

$# BUDGETED INCOME STATEMENT

reparing the budgeted income statement inoles combining the releantamounts from the sales, cost of goods sold and selling L administratie e8pense

budgets and then subtracting interest, bad debts and income ta8es to obtainbudgeted net income# These amounts are proided by the finance department# !na comprehensie practice problem, the applicable amount for interest e8pensemay need to be calculated from information associated with the cash budget# Baddebt e8pense is based on the e8pected proportion of uncollectible stated in theinformation related to cash collections#

a# Budgeted %ales G - Budgeted 5ost of Foods %old H Budgeted Fross rofit

b# Budgeted Fross rofit - Budgeted %elling L dministratie /8penses Hperating !ncome

c# perating !ncome - !nterest /8pense - Bad &ebts /8pense H .et !ncome

Before Ta8es

d# .et !ncome Before Ta8es - !ncome Ta8es H .et !ncome fter Ta8es+6


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T#E FINANCIA BUDGET

s indicated in /8hibit 3-6, the financial budget includes the cash budget, the

capital budget and the budgeted balance sheet# The cash budget and budgetedbalance sheet are discussed below#

10# CAS# BUDGET

a# Budgeted 5ash ailable H Beginning 5ash Balance I Budgeted 5ash5ollections from 1

b# Budgeted 5ash /8cess or &eficiency H Budgeted 5ash ailable -Budgeted 5ash ayments from 4e, 6b, ;b and Ab

c# /nding 5ash Balance H 5ash /8cess or &eficiency I Borrowings -0epayments including !nterest

11# BUDGETED BAANCE S#EET

reparing the budgeted balance sheet inoles accumulating information fromthe preious period=s balance sheet, the arious operating sub-budgets, the cash

budget and other accounting records#

ASSETS

a# 5urrent ssets:5ash $from the cash budget 1Dc'ccounts 0eceiable $from the sales budget and preious balance sheet'&irect materials $from the ending inentory budget >a'inished goods $from the ending inentory budget >c'

b# 2ong Term ssets:2and $from preious balance sheet and budgeted actiity'Buildings $from preious balance sheet and budgeted actiity'/quipment $from preious balance sheet and budgeted actiity'ccumulated depreciation $from the accounting records'

Total ssets

IABIITIES

+;


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c# 5urrent 2iabilities:ccounts ayable $from arious operating sub-budgets'Ta8es ayable $from income statement'

d# 2ong term 2iabilities

Total 2iabilities

S#ARE#ODERS EUITY

e# 5ommon %tock $from preious balance sheet and budgeted actiity'

f# 0etained /arnings $from preious balance sheet and income statement'

Total %hareholders= /quity

Total 2iabilities and %hareholders= /quity

STEPS TO PREPARE MASTER BUDGET

master budget helps you to plan and coordinate all of the different budgets needed torun an enterprise# !t includes budgets for sales, production or purchases, selling andadministratie e8penses, an income statement, a cash flows statement and a balancesheet# !n the budgeting process, the master budget proides a single map e8plaininghow the company intends to earn profits and positie cash flow for the coming period#

P/,+ S*,7"-

%tart the budgeting process by estimating sales# Fo to the sales or marketing departmentand request anticipated sales for the coming period# This estimate could be based on

economic projections, consultants7 reports, or a simple analysis of trends in prior years#

P* P/38+"-

igure out the number of units of each product that you need to produce, using thefollowing formula: /8pected sales $in units' I &esired ending inentory $in units' -Beginning inentory $in units' H Units to be produced# This assumes that you7re amanufacturer# !f you7re a retailer that doesn7t produce its goods, then use a similarformula to estimate the number of units that need to be purchased: /8pected units to be

sold I &esired units of ending inentory - Units of beginning inentory H Units to bepurchased# Multiply the number of units to be produced $or purchased' by the cost per

+>


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unit to figure out the total cost of units to be produced $or purchased'# Manufacturerscan skip to %tep >#

D,7 */ B83,+"-

The direct labor budget estimates how much work must be done to meet yourproduction plans, and the number of employees needed# To figure out the direct laborbudget, ascertain $1' how many hours of direct labor are needed to produce each unitand $+' the aerage direct labor rate# Multiply both these factors by the number of Unitsto be produced that you estimated in the %tep + roduction budget: (ours needed to

produce each unit 8 erage direct labor rate 8 Units to be produced H Total direct laborcosts To figure out the number of employees needed, diide total hours to be worked bythe number of hours worked per week: $(ours needed to produce each unit 8 Units to

be produced' erage number of hours worked per week by each employee H .umber

of employees needed for production#

P+ O9,/=,*3"-

To prepare the erhead budget, multiply the number of Units to be produced by the)ariable oerhead cost per unit# Then add Total fi8ed oerhead cost: $Units to be

produced 8 )ariable oerhead cost per unit' I Total fi8ed oerhead H Total oerhead# Toestimate the )ariable oerhead cost per unit and Total fi8ed oerhead, account analysis,a scatter graph of oerhead, the high-low method, or regression analysis will help you

understand the relationship between oerhead costs and olume#

E7+*+, S, *3 A37+/*+9, E4,7,7"-

%ales don7t happen automatically# *ou need to pay for sales agents, adertising, andother marketing costs# ll of these estimated costs are tabulated in the %elling andadministratie e8pense budget#

*


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;'# ther e8penses include %elling and administratie e8penses $see %tep >', generale8penses, depreciation e8penses, and also income ta8 e8penses# Chen complete, the

budgeted income statement answers a critically important question: Cill your companybe profitable ne8t yearJ !f you7re dissatisfied with the estimated profits, then you mayneed to go back to %tep 1 and rework your numbers#

F/8*+, * B83,+,3 C*7= F7 S+*+,,+"-

budgeted cash flows statement adds all of the e8pected cash receipts and subtracts thedisbursements for the coming period# 5ash receipts come from sales - but be careful&on7t list the sales themseles, but the cash flows from sales# This means adjusting forthe rate at which you collect payment for your sales# 5ash disbursements need to bemade for purchases of raw materials $%tep 4', direct labor $%tep 6', oerhead costs $%tep;', selling and administratie e8penses $%tep >', and capital acquisitions $%tep @'#

B/ D * B83,+,3 B**, S=,,+"-

The budgeted balance sheet is based on the following formula: ssets H 2iabilities I%tockholders7 /quity !t e8plains how the business plan for the coming period will affectthe company7s finance position at the end of that period#

CONCUSION"-

! want to conclude my project by saying that a master budget is only a tool# !tdoes not mean that if the company has an e8cellent strategic tool, eerything willwork out right# .othing cans substitute for teamwork in the organi9ation#/eryone should be united in achieing the goals and leading the race in thiscompetitie world of business#

REFERENCES"-

ollowing are the references from where the information is been collected:-

http:NNwww#accountingtools#comNmaster-budget

http:NNmaaw#infoN5hapter3#htm

+A
http://www.accountingtools.com/master-budgethttp://maaw.info/Chapter9.htmhttp://www.accountingtools.com/master-budgethttp://maaw.info/Chapter9.htm


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http:NNwww#slideshare#netNmaster-budget-6;@>1@3;

http:NNaccountinge8plained#comNmanagerialNmaster-budget

http:NNwww#myaccountingcourse#comNaccounting-dictionaryNmaster-budget

http:NNsmallbusiness#chron#comNmajor-components-master-budget-;3616#html
http://www.slideshare.net/master-budget-45761795http://accountingexplained.com/managerial/master-budgethttp://www.myaccountingcourse.com/accounting-dictionary/master-budgethttp://smallbusiness.chron.com/major-components-master-budget-59414.htmlhttp://www.slideshare.net/master-budget-45761795http://accountingexplained.com/managerial/master-budgethttp://www.myaccountingcourse.com/accounting-dictionary/master-budgethttp://smallbusiness.chron.com/major-components-master-budget-59414.html

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Master Budget