Master Budget

and
Responsibility Accounting

1.
2.
3.
4.
5.

Describe the master budget and explain its

benefits
Describe the advantages of budgets
Prepare the operating budget and its
supporting schedules
Use computer-based financial planning
models for sensitivity analysis
Describe responsibility centers and
responsibility accounting

6.
7.

Recognize the human aspects of budgeting

Appreciate the special challenges of
budgeting in multinational companies

A _________ is the quantitative expression of a

proposed plan of action by management for a
_____________ period.

A budget is an aid to coordinating what needs

to be done to implement that plan.

A budget generally includes both the plans

financial and nonfinancial aspects and serves as
a blueprint for the company to follow in an
upcoming period.

Communicate directions and goals to

different departments of a company to help
them coordinate the actions they must
pursue to satisfy customers and succeed in
the marketplace.

Judge performance by measuring financial

results against planned objectives, activities,
and timelines to learn about potential
problems.

Motivate employees to achieve their goals.

To develop successful strategies, managers must

consider questions such as the following:
What

are our objectives?

How do we create value for our customers while
distinguishing ourselves from our competitors?
Are the markets for our products local, regional,
national or global?
What trends affect our markets?
What organizational and financial structures serve
us best?
What are ______ and ____________________ of
alternative strategies and what are our
contingency plans if our preferred plan fails?

1.

Before the start of a fiscal year, managers at

all levels take into account past performance,
market feedback, anticipated future changes
and other indicators to initiate plans for the
_______ period.

2.

Senior managers give subordinate managers a

frame of reference against which they will
compare actual results.

3.

Managers and management accountants

investigate any deviations from the plan.

The master budget is at the core of the

budgeting process. It expresses managements
_____________ and ____________________ for
a specified period:
Operating

decisions deal with how to best use

the limited resources of an organization. (the
__________________________)
Financial decisions deal with how to obtain the
__________ to acquire those resources. (the
__________________________)

Promotes coordination and communication

among subunits within the company.

Provides a framework for judging

performance and facilitating learning.

Motivates managers and other employees.

Top managers want lower-level managers to

participate in the budgeting process because
they have more specialized knowledge of
day-to-day management, however

The budgeting process is time-consuming, &

Upper-level managements support is crucial.

The timeline for a budget is dependent on

the motive for creating the budget.

The most frequently used budget period is

_______ year.

Businesses may also use a rolling budget.

This budget is always available for a
specified future period, by continually
adding a month, quarter, or year to the
period just ended.

1.
2.
3.
4.
5.

Identify the problem and uncertainties

Obtain information
Make predictions about the future
Make decisions by choosing among alternatives
Implement the decision, evaluate performance
and learn

1.
2.
3.

4.

Prepare the revenues budget (schedule 1,

the starting point; p.228)
Prepare the production budget (schedule
2, in units; p.229)
Prepare the
___________________________ budget and
___________________________ budget
(schedule 3; p.229-230)
Prepare the
___________________________ budget
(schedule 4; p.230-231)

5.
6.
7.
8.
9.

Prepare the ___________________________

budget (schedule 5; p.232-233)
Prepare the ending inventories budget (schedule
6A, units; schedule 6B, dollars; p.233-234)
Prepare the cost of goods sold budget (schedule
7; p.234)
Prepare the _____________________ (period
cost) budget (schedule 8; p.235)
Prepare the budgeted ______________________
(Exhibit 6-3; p.235)

Based on the operating budgets:

1.
2.
3.
4.

Prepare the capital expenditures budget.

Prepare the cash budget.
Prepare the budgeted _________________.
Prepare the budgeted
____________________________________.

Financial planning models may be

employed to conduct sensitivity (whatif) analysis to assist in the budgetary
process.

A what-if analysis or sensitivity

analysis is a technique that examines
how a result will change if the original
predicted data or underlying assumption
________.

Sensitivity analysis is used to assist managers in

planning and budgeting.

Sensitivity analysis is a what if technique that

illustrates the impact of changes from the predicted

data.
Two scenarios are being considered for Stylistic

Furnitures (the company from the textbook) budget.

In scenario 1, if the price is reduced (column

D and E); then will result in a 22% decrease
in budgeted operating income (column I).
In scenario 2, if the direct material cost is
increased (column F and G); then will result
in a 8% decrease in budgeted operating
income (column I).

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.

Generally, we consider 4 levels of

responsibility center (see next slide).

1.
2.
3.
4.

Cost accountable for costs only

Revenue accountable for revenues only
Profit accountable for revenues and costs
Investment accountable for investments,
revenues, and costs

Budgets offer feedback in the form of

____________: actual results deviate from
budgeted targets.

Variances provide managers with:

Early

warning of problems
A basis for performance evaluation
A basis for strategy evaluation

Controllability is the degree of influence that a

manager has over costs, revenues, or related items
for which he or she is being held responsible.

Responsibility accounting helps managers to first

focus on whom they should ask to obtain information
and not on whom they should blame.

Responsibility accounting focuses on gaining

information and knowledge, not only on control.

The fundamental purpose of responsibility accounting

is to enable future improvement.

Budgetary slack is the practice of

underestimating budgeted revenues or
overestimating budgeted costs to make
budgeted targets easier to achieve.

Stretch targets are targets that are

challenging but achievable to focus effort on
achieving the targets.

International companies face significant

exchange rate uncertainty rendering budgets
for traditional purposes of evaluating a firms
performance moot but still very useful as a
tool to help managers adapt plans and
coordinate actions when conditions are
volatile.

TERMS TO LEARN

PAGE NUMBER REFERENCE

Activity-based budgeting (ABB)

Page 209

Budgetary slack

Page 218

Cash budget

Page 225

Continuous budget

Page 202

Controllability

Page 217

Controllable cost

Page 217

Cost center

Page 216

Financial budget

Page 203

Financial planning models

Page 213

Investment center

Page 216

TERMS TO LEARN

PAGE NUMBER REFERENCE

Master budget

Page 199

Operating budget

Page 203

Organization structure

Page 216

Pro forma statements

Page 199

Profit center

Page 216

Responsibility accounting

Page 216

Responsibility center

Page 216

Revenue center

Page 216

Rolling budget

Page 202

Rolling forecast

Page 202