CHAPTER 8 NOTES

COURSE OBJECTIVE D: Prepare a master budget and use the information in it to analyze the results of operations.

This chapter will examine in detail the preparation of a master budget, including schedules for sales, collections, cost of sales, payments, operating expenses, a cash budget, and budgeted income statement and balance sheet. It will discuss the purposes and uses of budgets for managers.

Profit planning involves the preparation of a number of budgets, integrated as the master budget, that outline what will be necessary for the organization to achieve its profit goals.

A budget is a quantitative plan to acquire and use resources in a specific time period. • Planning: develop goals and prepare budgets. • Control: managers ensure that the goals are achieved in a cost efficient manner. • See Chapter 2: planning and control cycle – particularly Exhibit 2-1.

Why should an organization prepare a budget?

1. Communication: everyone in the organization will be aware of the goals and plans, and their part in them. 2. Planning: avoid “putting out fires,” that is, crises caused by no foresight. Managers must think and plan ahead formally. 3. Resource allocation: Resources are always limited. Which projects will be funded? Where can the organization’s limited resources be used most effectively? 4. Constraints: (Bottlenecks) identify these before they become a reason for goals to be missed. (See Chapters 2, 12) 5. Coordination of activities: Actions throughout the organization must be integrated into an overall plan, so that everyone is working toward the same goals. 6. Benchmarking: the budget serves as the guide to what performance should be, so that as the actual period unfolds, it can be used to compare actual results and evaluate performance.

Responsibility accounting holds that a