I-Les7 - LESSON 7 The master budget Topic outline and...

LESSON 7
The master budget
Topic outline and required reading
7.1 Overview of the budgeting process
and the master budget (Level 1)
•
Chapter 9,
pages 371-378
7.2 Preparing the master budget
(Level 1)
•
Chapter 9,
pages 379-395
7.3 Other budgeting techniques
(Level 2)
•
No required
reading
7.4 International aspects of budgeting
and control (Level 2)
•
Reading 7-1:
“Currency Exposure and Risk
Management”
7.5 Computer illustration 7-1: Sales
budget and cash collection schedule
(Level 1)
•
No required
reading
Summary
Introduction
This lesson describes the planning and control activities performed by managers and the
usage of various types of budgets in the planning process. The budget preparation steps are
worked through, leading into preparing the master budget. The master budget is based on the
concept of static or fixed budget geared to only one level of activity. Under static budgeting,
actual results are measured against budgeted costs at the original level of budget activity.
Computer illustration 7-1 demonstrates the use of a spreadsheet program to prepare a sales
budget and cash collections schedule. It also demonstrates a basic what-if analysis of the
response to changes in selling price and sales volume.
Learning objectives
After completing this lesson, you should be able to do the following:
•
Define budgeting and explain the difference between planning
and control.
•
Prepare the following budgets:

sales budget

production budget

direct materials budget

manufacturing overhead budget

selling and administrative expense budget

cash budget

budgeted income statement and balance sheet
•
Describe other budgeting techniques.
The learning objectives for Computer illustrations 7-1 are listed at the beginning of the
computer illustration.
Management Accounting Fundamentals Lesson 7  1

TOPIC 7.1
Overview of the budgeting process and the master
budget
Required reading
Chapter 9, pages 371-378
LEVEL 1
Begin this topic by reading pages 371 to 378 in the textbook. It will give you an idea about
the basic framework of budgeting.
Three levels of planning activities exist in the organization: (1) strategic planning , (2) capital
budgeting , and (3) operating budgeting . Strategic planning is concerned with the long-term
decisions such setting the mission and defining the scope of the business. Capital budgeting is
concerned with intermediate range planning. It involves decisions such as replacing a piece of
equipment and other kind of acquisitions. Operating budget involves the preparation of a
master budget that will help the company achieve its objectives over the short term. Let’s first
define the budget.
A budget is a formal plan for the future expressed in quantitative terms. A budget is also a
tool for analyzing progress toward management objectives. This lesson focuses on the use of
budgeting as a planning and control tool for the management of an organization. It is the job
of top management to formulate strategy for the organization. Management must set the
overall mission and objectives for the business unit. The objectives of the company and the