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

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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
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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
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