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CHAPTER 6

Master Budgeting
and
Responsibility Accounting

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Budget defined
The quantitative expression of a proposed
plan of action by management for a
specified period,
May include financial and non-financial data

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Why use budgets?


A common accounting tool used to implement
strategy
O Provides a framework for judging

performance (are we meeting goals?)


O Coordinates action throughout the company,
as subunits fulfill their part of the budget
O Motivates employees
O Aids in foreseeing opportunities and
problems

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Skills required for Ch. 6


O Prepare the operating budget and its

supporting schedules
O Prepare the cash budget

See Exhibit 6-2 and p. 191 - 196

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The Ongoing Budget


Process:
1. Who: Managers/accountants
2. What:

Past performance
+ Anticipated changes
= Current budget

Current budget is a set of goals against


which results will be compared

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The Ongoing Budget


Process:
3.
4.

Variances are investigated.


Corrective action is taken.
Feedback from budget, other
sources, is used to plan the next
period.

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Components of the Master


Budget
1. Operating Budget
Revenue Production DM DL MOH COGS
R&D Design Mktg Distn Income
statement

2. Financial Budget
Capital expenditures Cash Balance sheet
Stmt of Cash flows

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Budget Steps
O Budgets are prepared in a specific

order
(See 9 steps to operating budget in text)

O Each successive budget requires

information from the previous budget


Components of operating budget vary by firm

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Additional comments
O Financial-planning software can be

used to conduct sensitivity analysis


with budgets
O Kaizen Budgeting uses budgets
to pursue continuous improvement
O Activity-Based Budgeting
Activity-Based Costing used in
budgeting

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Sensitivity analysis

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Responsibility Accounting
O Responsibility Center

subunit of the firm whose manager is


accountable for certain activities
O Responsibility Accounting

system that measures the results of each


responsibility center
Remember to focus on information sharing,
analysis, NOT blame

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Responsibility Center Types


1.

Cost accountable for costs

2.

Revenue accountable for revenues

3.

Profit accountable for revenues &


costs

4.

Investment accountable for


investments, revenues, and costs

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Feedback (a control activity)


O Variance

Difference between actual & budgeted


results
O Why calculate variances?
Early warning of problems,

opportunities
A basis for performance evaluation
A basis for strategy evaluation

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Terms
O Controllability - Degree of a

managers influence over items for


which he is held responsible
O Slack - Attempting to ease

budgetary constraints by
underestimating
revenues/overestimating expenses
during planning process

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Human Behavior
Superiors
O Dominate the budget process
O Hold subordinates accountable when

in fact they lack control

Subordinates
O Build slack into budgets

Abuse of the budgeting process has negative


outcomes

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