...CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING I. LEARNING OBJECTIVES 1. Describe what the master budget is and explain its benefits 2. Describe the advantages of budgets 3. Prepare the operating budget and its supporting schedules 4. Use computer-based financial planning models in sensitivity analysis 5. Explain kaizen budgeting and how it is used for cost management 6. Prepare an activity-based budget 7. Describe responsibility centers and responsibility accounting 8. Explain how controllability relates to responsibility accounting II. CHAPTER SYNOPSIS Chapter 6 introduces the important topic of budgets. Budgets are the primary financial planning tool used by businesses. The chapter explains how businesses use budgets and budgeting as part of the management process. The concept of responsibility centers and responsibility accounting is also discussed and related to the concept of controllability. III. CHAPTER OUTLINE Budgets represent in financial and nonfinancial terms the plans of a business for a specified period of time. Financial budgets are, in essence, financial statements that report expected or proposed future activity instead of what has already occurred. Supporting these financial budgets are nonfinancial budgets that report expected or proposed future activity in areas such as number of employees, new products developed, and number of units produced or sold. (Exhibit 6-1 illustrates...
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...Chapter 10 Strategy and the Master Budget Cases 10-1 Emerson Electric Company © Joseph San Miguel, reprinted with permission. 10-2 LetsGo Travel Trailers (Source: “LetsGo Travel Trailers: A Case for Incorporating the New Model of the Organization into the Teaching of Budgeting,” by Sally Wright, Cases from Management Accounting Practice, Vol. 14, Montvale, NJ: Institute of Management Accountants, 1998). Note that part 2 of this case requires the use of Excel. 10-3 Building Processes for a Solid Foundation: The Case of Community Health Initiatives (Source: Sandra Richtermeyer, Strategic Finance, August 2007, pp. 52-57. Note: this case was the case used as the 2008 IMA Student Case Competition. The Student Case Competition is sponsored annually by the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and communicate a solution to a management accounting problem.) 10-4 Academic Advising at Bay State (Source: Janice E. Bell and Shahid L. Ansari, Strategic Finance, September 2008, pp. 44-51. Note: this case was the case used as the 2009 IMA Student Case Competition. The Student Case Competition is sponsored annually by the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and communicate a solution to a management accounting problem.) Readings 10-1: “How to Set Up a Budgeting and Planning System” by Robert N. West and Amy M. Snyder, Management Accounting (January 1997)...
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...Master and Flexible Budgets ACC/543 January 28, 2013 Thomas Benscoter MEMORANDOM Date: January 28, 2012 To. Guillermo Furniture Company From: Ashley Lee, Ebony De La Torre, Janelle Durham, Misha Cross ------------------------------------------------- Re: Master and Flexible Budgets Guillermo Furniture: Master and Flexible Budgets A master budget can be a communication tool in which the company’s employees can perceive how their hard work affects the company’s goals. The budget is an outline of a company's plans that sets detailed goals for an organization regarding sales, production, distribution, and financing. This tool can also reveal if employees are meeting their goals set forth by the company in the budget and make corrections to employees. The following memorandum on Guillermo Furniture Store includes a master budget. The explanation of the relationship between fixed and variable cost used in the budget will occur. The difference between static and flexible budgets and how a flexible budget lends itself to a cost-volume profit analysis will be discussed. Fixed and Variable Costs Fixed costs in a budget remain constant even when volumes fluctuate. Fixed costs...
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...very experienced and eloquent when it comes to selling his products. There is another reason for choosing the shop. It is the ease of doing the master budget on a shop which primarily sells shirts. His shop does not have many of the expenses a typical manufacturing shop would have. All of his products are bought from whole sellers so there is only an inventory that we must consider while making the master budget. Background of the shop: Mr hasan has been doing business for many years in different places. He used to be a rickshaw puller but when he became old and it became very difficult to pull rickshaw he decided to establish his own shop. Now his son helps him in his business. He cannot employ any sales person due to his limited profit margin. It becomes very difficult for him to run his family with such a trifling amount of money. He primarily sells shirts. That the product we will be focusing on to in our master budget. The location of his dokan is in khilkhet bazar. Its below the over bridge where it remains very crowdie at pick ours. Sales budget: The price per unit of shirt is tk 350. And hasan basraalai does not sell in credit so all the money is collected in their own quarter. hasan basraalai Sales Budget For the year ended December 31,2016 | | | Quarter | | | | | 1 | 2 | 3 | 4 | Year | Budgeted unit...
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...Flexible Budgets ACC/543 November 17, 2014 Differences between Master and Flexible Budgets There are two main differences between the master and the flexible budgets. The two budgets have different uses and they treat volume changes in different manners. The master budget is the official budget that management has decided to go with. It is their planned volumes, expenses, and revenues that were determined for the upcoming year. It is used as the starting point by which benchmarks are measured. It is the best estimate that the business has decided to go with based on the current facts at the time the budget was made. The master budget does not change after it has been put into place so it does not account for changes in volume. Flexible budgets change as estimates in volume change. It takes different levels of volumes and determines what the expected costs and revenues would be based on the rates budgeted in the master budget. Variable costs would remain the same per unit cost as in the master budget. This is important as a manager might think he is coming under budget when compared to the master budget but when compared to a flexible budget based on the new volume, he might be over budget. Fixed costs would also remain the same so the per unit cost for these would change as volume changed. This allows companies to say what their budgeted costs should be based on the new volume. Using spreadsheets, the company can make changes to the flexible...
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...managerial accounting courses gain an in-depth knowledge of budgeting by developing and using a multi-product, multi-period master budget. The case consists of two segments that can be used in conjunction or separately. The first segment allows students to create a master budget. The second segment allows students to use their budgets to make recommendations for improving company performance. The use of multiple products and introduction of incentives to improve company performance add a degree of complexity above that found in most budgeting problems. Working on this type of case provides students with a greater understanding of both the flexibility of a master budget and of the information such a budget can provide to decision-makers. In addition, the case illustrates the incentives for budget padding, providing an opportunity to conduct a discussion of ethical budgeting and potential consequences in a rich context. This is a Simplified Chinese version. This case is intended to help students in upper division or graduate cost or managerial accounting courses gain an in-depth knowledge of budgeting by developing and using a multi-product, multi-period master budget. The case consists of two segments that can be used in conjunction or separately. The first segment allows students to create a master budget. The second segment allows students to use their budgets to make recommendations for improving company performance. The use of multiple products and introduction of incentives to...
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...1. What is your evaluation of each of the three businesses? What is your evaluation of the managers who run them? French Division Units ('000) Profit Plan (Master Budget) Profit before Interest and Taxes = 1027 Flexible Budget Profit before Interest and Taxes = 2,002 But Actual Profit earned = 1242 which is 760 less than profit anticipated in flexible budget. Increase in the profits above the actual budget can be attributed to 20% increase in sales in 2009. Although Jean’s profits were above the actual budget, French Division’s earnings were much lower than what it could have been, had they budgeted for the actual volume of sales that they ended up selling. We can partly attribute this decrease in earnings to the fact that the French division had to sell a certain volume of its products to the Spanish region at a lower contribution margin. Also, Jean had invested a lot of time in managing the expansion into west coast of France, cultivating relationships with vendors and suppliers and working on distribution channels. We agree with Jacques that they would have to wait for some years to receive the full benefits from this investment. But had Jean incorporated this wait in his budgeted profit plan, he would have been able to achieve a realistic sales objective. Besides, Jean should focus more on sales drop in traditional regions of French Market and maintaining relationships with distributors in the east coast as it was hurting their core business. Focusing...
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...operations. | True | | False | 2. The typical starting point of a master budget would be to prepare a budgeted balance sheet. | True | | False | 3. A flexible budget allows management to spend more or less for labor and materials without regard to the amount of production. | True | | False | 4. In a master budget, the sales forecast would be dependent upon the budgeted production figures. | True | | False | 5. Flexible budgets can be prepared for sales budgets but not for productions budgets. | True | | False | 6. The behavioral approach to budgeting has as its goal the complete elimination of inefficiency. | True | | False | 7. A budget prepared using the total quality management approach is always achievable by departments within a company. | True | | False | 8. A company's operating cycle is the time between purchases of direct materials and conversion of these materials back into cash. | True | | False | 9. The operating cycle is the average time required to manufacture products for sale. | True | | False | 10. Under the "total quality management" philosophy, budgeted amounts should be set at realistic and achievable levels rather than at levels representing absolute efficiency. | True | | False | 11. A master budget actually includes a number of related budgets. | True | | False | 12. In preparing a master budget, budgeted levels for production, manufacturing costs, and operating expenses...
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...Discuss the sequence in which the major components of the master budget are prepared. Why is it necessary to prepare the components in such a sequence? The Sequence for a master budget is as follows: A production budget, purchases budget, personnel budget, direct labor budget, overhead budget, selling and administrative budget, capital budget, and budgeted financial statements. Using this sequence to create a master budget a manager has assistance to align activities and resources allocations with organizational goals; it’s a vehicle to promote employee participation, cooperation, and department coordination. It's also a tool to enhance conduct of the managerial functions of planning, controlling, problems solving; basis on which to sharpen management's responsiveness to changes in both internal and external factors; and model that provides a rigorous view of future performance of a business in time to consider alternative measures. 7. Why is a firm’s production budget influenced by the finished goods inventory policy? The production budget follows from the sales budget and is based on information about the type, quantity, and timing of units to be sold. (A retail or service company would not prepare a production budget.) Sales information is combines with beginning and ending Finished Goods (FG) Inventory information so that managers can schedule necessary production. 8. Assume that in preparing the cash budget, the accountant discovers that a cash shortage will likely...
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... Service department costs can be assigned to ________. customers only producing departments only customers and producing departments none of the above A major benefit of effective budgeting is that ________. it compels managers to think ahead it aids managers in communicating objectives to employees it provides benchmarks to evaluate subsequent performance all of the above A budget is a qualitative expression of a plan of action. True/ False The effectiveness of any budgeting system depends directly on the attitudes of top management toward the budgeting system. True/ False Managers may ________ their budgeted costs or ________ their budgeted revenue to create a budget target that is easier to achieve. understate; overstate overstate; understate understate; understate overstate; overstate Managers may lie to increase the resources allocated to their departments. True/ False Which of the following budgets identifies the overall goals and...
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...covered in detail in chapters one and two. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as: "The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision". Chapter objectives This chapter is intended to provide: marketing as a key marketing control technique An overview of the advantages and disadvantages of budgeting Structure of the chapter Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centres, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put. Like all management tools, the chapter highlights the need for detailed information, if the technique is to be used to its fullest advantage. Budgetary control methods a) Budget: activities in a given period of time. -ordinate the activities of the organisation. An example would be an advertising budget or sales force budget. b) Budgetary control: can either exercise control action or revise the original budgets. Budgetary control and responsibility centres; These enable managers to monitor organisational functions. A responsibility centre can be defined as...
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...Performance Measures Click Link Below To Buy: http://hwcampus.com/shop/acc650-module-4-budgeting-performance-measures/ 1. A formal budget program will almost always result in: a. higher sales. more cash inflows than cash outflows. b. decreased expenses. improved profits. a detailed plan against which actual results can be compared. 2. Darling Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 12,000 Actual variable overhead incurred: $730,000 Actual machine hours worked: 60,000 Budgeted fixed overhead $72,000 Planned level of machine-hour activity 50,000 If Darling estimates four hours to manufacture a completed unit, the company's standard fixed overhead rate per machine hour would be: a. $12.00. $14.40. $14.60. $15.00. some other amount. Standard fixed overhead rate per machine hour = Budgeted fixed overhead/Planned level of machine hour activity $720,000/50,000 machine hours $14.40 per machine hour 3. Wilson Corporation is budgeting its equipment needs on an ongoing basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a: a. capital budget. rolling budget. revised budget. pro-forma budget. financial budget. 4. Bird plans to sell 5,000 units each quarter next year. During the first two quarters each unit will sell for $12; during the last...
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...Budgets Rosa M. Oyola-Jerez American Military University FINC 405 B004 Professor: Greg Harms April, 30, 2011 Budgets Here would be explain what is a master budget? What factors cause budget variances? It would also be explain the difference between a favorable and unfavorable variance, and an example of it would be provided. It would also be explain the difference between static and a flexible budget with an example of it. A master budget in my words is a recompilation of all different budgets of a company, in other words the master budget would have many other budgets describing the different parts of the operations in the organization. An example of a budget would begin here by the knowledge of the behavior of the cost, that is to say, the answer of a cost to different volumes of the production, turns out to be essential in the planning and the cost control. It can be perceived the behavior of the cost whether since the profitable angle of the business in its entirety. The behavior of the cost plant a practical aspect: upon enlarging or to diminish the production (level of activity) in a center of responsibility with each expense assigned to that center that is going to conduct an individual budget. A budget is a statement of the results expected, aforesaid in numerical terms. It can be considered like a program "aforesaid in I number". In fact, to the financial budget of operations often him he is called "plan of utilities". The budget can be expressed in financial...
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...Group Project Course: Act 202 Topic: A Master Budget for local Store (Dokan) Date of submission: 7th December 2015 Submitted to: Mohammed Sarwar Rakebder School of business Department of finance and accounting Submitted by: Name | ID | Md Ali AShraf | 1030207030 | | | | | Master Budget for a local tea store (Dokan) Prepared by Ashraf, rafi, mehedi, abrar TABLE OF CONTENTS Serial No. | Title | Page no. | 1. | Letter of submission | 5 | 2. | (Executive Summary) | 5-7 | 3. | Introduction | 7 | 4. | Nature of the business | 8 | 5. | Primary Product | 8 | 6. | Locations | 9 | 7. | Master Budget | 10 | 8. | Reference | 11-14 | 9. | (Appendix) | 14 | LETTER OF SUBMISSION Date : Mohammad Sarwar Rekabder Instructor of ACT 202 School of Business & Economics (SBE) Northsouth University Subject: Submission of the report analysis and master budget of Masum tea stall. Dear sir, We are very delighted to submit of our Report analysis and master budget of Masum tea stall which is situated at Mog Bazar in Dhaka city.as part of the BBA student. We completed this report which is worthwhile experience for us as it was in such an enjoyable work has enriched both our knowledge and experience. We believe that this report will meet your approval. If further information is required. We will be glad to provide that any time of your convenience. Your kind advice will encourage us to do further research in future...
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...Table of contents Introduction 12 Body 13 3.1 Explain the purpose and nature of budgeting process which should normally be taken in the preparation of budgets for Glentruan Furniture Ltd. 13 Budget 13 Purpose and nature of budget 15 Purpose 15 Nature 15 3.2 Select appropriate budgeting methods for new product line and its need. 16 Incremental budget 16 Zero based budget 16 Different between zero based budgeting and incremental budget 16 Fixed budget 17 Flexible budget 17 Different between fixed and flexible budget 17 Functional budget 18 Sales budget 18 Production budget 18 Direct material usage budget 18 Direct material purchase budget 18 Direct labor budget 18 Factory overhead budget 18 Selling and administration budget 18 Cash budget 19 Master budget 19 3.3 Prepare budgets according to the chosen budgeting methods based on the given information in the scenario. 20 Sales budget 20 Production budget 22 Direct material usage budget 23 Direct material purchase budget 26 Direct labor budget 28 Factory overhead budget 30 Selling and administration budget 34 Departmental budget 35 3.4 Also prepare a cash budget. 38 Cash budget 38 Master budget 42 Budgeted profit and loss 42 Budgeted balance sheet 43 Final review 46 Budget committee 47 Working capital 47 Liquidity ratio 47 ROCE 47 4.1 Calculate variances, identify possible causes and recommend corrective action. 48 4.2 Prepare and operating statement...
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