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Unformatted text preview: CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6- 1 The budgeting cycle includes the following elements: a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. b. Providing a frame of reference, a set of specific expectations against which actual results can be compared. c. Investigating variations from plans. If necessary, corrective action follows investigation. d. Planning again, in light of feedback and changed conditions. 6- 2 The master budget expresses management's operating and financial plans for a specified period (usually a year) and comprises a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period. 6- 3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long- run and short- run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans. 6- 4 Budgeted performance is better than past performance for judging managers. Why? Mainly because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past. 6- 5 Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing battles between these two functions in two ways. Consider a beverage company such as Coca- Cola or Pepsi- Cola: Communication. Marketing could share information about seasonal demand with production. Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer. 6- 6 A company that shares its own internal budget information with other companies can gain multiple benefits. One benefit is better coordination with suppliers, which can reduce the likelihood of supply shortages. Better coordination with customers can result in increased sales as demand by customers is less likely to exceed supply. Better coordination across the whole supply chain can also help a company reduce inventories and thus reduce the costs of holding inventories. In addition, a company can gain information about competitors that will be useful in strategic planning and benchmarking. 6- 7 In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and 6-1 improve their performance. Thus, many top managers believe that budgets meet the cost- benefit test....
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