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| October 22, 2018

Module 6: Budgeting – Part I
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Mod 6: For Your

Learning Outcomes
Identify the elements of the master
Prepare a master budget.

Mod 6: Readings

Chapter 6 in Managerial
Module 6: Budgeting – Part I

Table of Contents” title=”Page 1″>Purpose of the Budget” title=”Page 2″>Components of the Master Budget” title=”Show All”>View All Content

I. Purpose of the Budget
A company’s budget is its strategic plan set to numbers and goals. Long-term
strategic goals set specific tactical targets and timetables assigning
responsibilities for achieving the goals to specific managers. The long-term
goals include profit projections that must be achieved through implementing
strategies that will utilize resources. The budget communicates the expected
resources that will be used and the expected profit that will be attained by
implementing the strategic plan of the organization. For example, if the vice
president of marketing is charged with achieving a 10% market share increase in
five years, she must build a budget with expenses and revenues that will
achieve an increase in market share.
The budgeting process, if implemented successfully, involves all functional
area managers in the organization. Since managers are responsible for their budgets,
it is essential that they are involved in the development of the budget. If
managers feel they have a voice in setting the budget targets, they will be
motivated to ensure that their departments attain those targets and stay within
the budget. If senior executives develop the budget without gathering input
from operational level managers, the process will be authoritative and limit
the control managers require to achieve the targets for which they are
responsible. If the senior executives allow the company controller to develop
the budget without input from the operational managers, the managers will not
understand the importance of the budget process.
Managers use budget information to control daily operations and measure
employee performance. As actual expenses are compared to budgeted expenses and
actual revenues are compared to budgeted revenues, managers are able to assess
the success of strategies being implemented. If the variances between budget
and actual are substantial, managers may have to investigate further the
reasons for the variances. The variances could be caused by inaccurate
estimates based on information not known at the time the budget was developed,
or it may be related to employee performance. Some organizations review the budget
and the assumptions made when preparing the budget on a regular basis
throughout the year. Since budgets are prepared with spreadsheets, revising the
budget when new assumptions arise can be accomplished more frequently than once
a year without expending the scarce resource of management’s time.
II. Components of the Master Budget
A master budget begins with the strategic plan of the organization and ends
with the projected financial statements for the budget period. Depending on the
type of organization, the master budget will have different components. A
master budget for a manufacturing company typically includes more components
than any other type of organization. The master budget for a manufacturing
company includes a cost of goods manufactured budget which is comprised of a
materials budget, a labor budget, and an overhead budget. In addition, major
areas of the income statement and balance sheet are supported with separate
budgets. For example, a selling and administrative expense budget supports the
selling and administrative expenses on the budgeted income statement and the
cash budget supports the cash figure on the budgeted balance sheet.
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The capital expenditures budget supports the large cash outlays that are
projected for the budget period. If equipment is to be purchased in the coming
budget year, then the capital expenditures budget would include the financing
required for the capital outlay as well as any cash that would be used.
The master budget for a service organization is similar to a manufacturing
organization’s as functional area budgets are compiled to complete the master
budget package. A service organization includes a service overhead budget and a
labor budget, but does not include a materials budget as there are no materials
used in a service organization.
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The strategic plan includes market share projections that the sales manager
must translate into the sales budget or the service revenue budget. The sales
budget is the first component prepared in the master budget. In a service
organization, the service revenue budget is the first component prepared in the
Once the service revenue or the sales budget is prepared, the cash expected
to flow into the organization is known, so the expenses can be projected based
on the sales and production projections. Continuing the example using a service
organization, the labor budget, the services overhead budget, and the selling
and administrative expense budget can all be prepared based on the service
revenues projects. For example, certain figures in the service overhead budget
may be based on a percentage of the sales revenue budget. Multiplying the
budgeted sales revenue for the year by the percentage projected for the items
in the overhead budget would provide the figures for the services overhead
After the operating budgets are complete, the financial budgets may be
prepared. The budgeted income statement is prepared using the figures from the
service revenues budget, the labor budget, and service overhead budget, and the
selling and administrative expenses budget. The budgeted income statement is
prepared using accrual based accounting assumptions. The cash budget is
prepared using cash inflows and outflows without regard to accrual based
accounting. The budgeted balance sheet is completed using the ending cash
figure from the cash budget and any changes in capital equipment included in
the capital expenditures budget. The budgeted income statement flows into the
budgeted balance sheet through retained earnings just as in actual financial
Every company has a budget process for the functional managers to follow.
The process of perparing the budgets may be slightly different in every
company, but the end result in every company is an operating budget for each
functional area and budgeted financial statements for the organization.

Have you
ever been involved in the budget process at your organization? Describe your
role and responsibilities. If you’ve never been involved in the budget process
at your organization, discuss why (or why not) you would want to be responsible
for the budget.

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