The master budget
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The Master Budget. JOIN KHALID AZIZ. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752

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The master budget

The Master Budget


Join khalid aziz

JOIN KHALID AZIZ

  • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

  • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

  • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

  • CONTACT:

  • 0322-3385752

  • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.


Advantages of budgets

Goals and

objectives

Advantages of Budgets

Budgets

A budget allows systematic rather

than chaotic reaction to change.


Advantages of budgets1

Compels

managers

to think

ahead

Provides definite

expectations that

are the best framework

to evaluate performance

Aids managers in

coordinating their efforts

Advantages of Budgets


Types of budgets

Types of Budgets

Strategic plan

Long-range plan

Capital budget

Master budget

Continuous budget


Strategic plan

Strategic Plan

The most forward-looking budget is the

strategic plan, which sets the overall

goals and objectives of the organization.


Long range plan

Long-Range Plan

The strategic plan leads to long-range

planning, which produces

forecasted financial statements

for five- to ten-year periods.


Capital budget

Capital Budget

Long-range plans…

are coordinated with capital budgets,

which detail the planned expenditures

for facilities, equipment, new products,

and other long-term investments.


Master budget

Sales

Production

Distribution

Finance

Master Budget

The master budget

summarizes the

planned activities

of all subunits of

an organization.


Continuous budget

are a common form of

master budgets that

add a month in the

future as the month

just ended is dropped.

Continuous Budget

Rolling budgets...


Components of master budget

Components of Master Budget

Operating budget

Financial budget


Steps in preparing the master budget

Steps in Preparing theMaster Budget

The principal steps in preparing

the master budget are:

1. Basic data

a.Sales budget

b.Cash collections from customers

c.Purchases budget

d.Disbursements for purchases

e.Operating expense budget

f.Disbursements for operating expenses


Steps in preparing the master budget1

2. Operating budget

3. Financial budget

Steps in Preparing theMaster Budget

1. Basic data


Operating budget

Cash collections

from customers

Purchases

budget

Disbursements

for purchases

Operating expenses

budget

Disbursements for

operating expenses

Operating Budget

Sales

budget


Cash collections

Cash Collections

It is easiest to prepare budgeted

cash collections at the same

time as the sales budget.

Cash collections include the current

month’s cash sales plus the

previous month’s credit sales.


Join khalid aziz1

JOIN KHALID AZIZ

  • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

  • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

  • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

  • CONTACT:

  • 0322-3385752

  • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.


Purchases budget

Purchases Budget

Budgeted purchases

= Desired ending inventory

+ Cost of goods sold

– Beginning inventory


Disbursements for purchases

Disbursements for Purchases

For example, 50% of the current month’s

purchases and 50% of the previous

month’s purchases may be included.

The total disbursements are then

used in preparing the cash budget.


Operating expense budget

Operating Expense Budget

The budgeting of operating expenses

depends on several factors.

Month-to-month changes in sales

volume and other cost-driver activities

directly influence many operating expenses.


Operating expense budget1

Operating Expense Budget

Expenses driven by sales volume

include sales commissions

and many delivery expenses.


Operating expense budget2

Operating Expense Budget

Other expenses are not influenced by sales

or other cost-driver activity and are regarded

as fixed, within appropriate relevant ranges.

Rent

Depreciation

Insurance

Salaries


Operating expense disbursements

Operating Expense Disbursements

Disbursements for operating expenses are

based on the operating expense budget.


Operating expense disbursements1

Operating Expense Disbursements

For example, 50% of last month’s

and this month’s wages and

commissions plus miscellaneous

and rent expenses may be included.

The total of these disbursements is then

used in preparing the cash budget.


Budgeted income statement

Budgeted Income Statement

The income statement will be complete

after addition of the interest expense,

which is computed after the cash

budget has been prepared.

Budgeted income from operations

is often a benchmark for judging

management performance.


Cash budget

Cash Budget

The cash budget has the following major sections:

  • available cash balance

  • cash receipts disbursements

  • cash needed from (or used for) financing

  • ending cash balance


Cash budget1

Cash Budget

Available cash balance

= Beginning cash balance

– Minimum cash balance desired.

Cash receipts depend on collections from

customers’ accounts receivable, cash sales,

and on other operating income sources.


Cash budget2

Cash Budget

Cash disbursements for purchases depend

on the credit terms extended by suppliers

and the bill-paying habits of the buyer.

Payroll depends on wage, salary, and

commission terms and on payroll dates.


Cash budget3

Cash Budget

Disbursements for some costs and expenses

depend on contractual terms for installment

payments, mortgage payments, rents,

leases, and miscellaneous items.

Other disbursements include outlays for

fixed assets, long-term investments,

dividends, and the like.


Cash budget4

Cash Budget

Management determines the minimum

cash balance desired depending

on the nature of the business

and credit arrangements.


Cash budget5

Cash Budget

Financing requirements depend on how

the total cash available compares

with the total cash needed.

Needs include the disbursements plus

the desired ending cash balance.


Join khalid aziz2

JOIN KHALID AZIZ

  • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

  • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

  • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

  • CONTACT:

  • 0322-3385752

  • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.


Cash budget6

Cash Budget

Ending cash balance

= Beginning cash balance

+ Receipts – Disbursements

+ Cash from financing

The cash from financing can be

either positive (borrowing)

or negative (repayment).


Budgeted balance sheet

Budgeted Balance Sheet

The final step in preparing the master budget

is to construct the budgeted balance sheet

that projects each balance sheet item in

accordance with the business plan.


Sales forecast

Sales Forecast

A sales forecast is a prediction of sales

under a given set of conditions.

Sales forecasts are usually prepared under

the direction of the top sales executive.


Factors to consider when forecasting sales

Factors to Consider When Forecasting Sales

Past patterns of sales

Estimates made by the sales force

General economic conditions

Competitors’ actions


Factors to consider when forecasting sales1

Factors to Consider When Forecasting Sales

Changes in the firm’s prices

Changes in product mix

Market research studies

Advertising and sales promotion plans


Getting employees to accept the budget

Getting Employees to Accept the Budget

To fully benefit from budgets, an

organization needs the support

of all the firm’s employees.

The attitude of top management will

heavily influence lower-level

workers’ and managers’ attitudes.


Getting employees to accept the budget1

Getting Employees to Accept the Budget

Another problem that can negate the benefits

of budgeting arises if budgets stress one set

of performance goals, but employees and

managers are rewarded for different

performance measures.


Participative budgeting

Participative Budgeting

Budgets created with the active participation

of all affected employees are generally more

effective than budgets imposed on subordinates.


Functional budgeting

Functional Budgeting

The budgeting focus is on preparing

budgets for various functions

such as production, selling,

and administrative support.


Activity based master budgets

Activity-Based Master Budgets

Emphasizes the planning and control

purpose of cost management.

Focus is on estimating the demand

for each activity’s output as measured by its

cost driver and consumption of resources.

Considered more useful for controlling

waste & improving efficiency.


Exercise

Exercise

Question:

Many non-profit organisations use budgets primarily to limit spending. Why does this limit the effectiveness of budgets?

[This tests your knowledge of the many roles of budgets.]


Exercise1

Exercise

  • Helps managers to plan ahead.

  • Provides definite expectations that are the best framework to evaluate performance

  • Aids managers in coordinating their efforts

  • A decision tool. It helps managers project the results of their decisions, thereby aiding them in making the right decisions.

  • -Provides a base for adapting to change.


Join khalid aziz3

JOIN KHALID AZIZ

  • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

  • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

  • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

  • CONTACT:

  • 0322-3385752

  • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.


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