• Unit 6: Budgeting

    In this unit, we explore the components for preparing a master budget and its underlying performance schedules. Business managers create budgets to plan for future operations, create benchmarks to measure progress, and maintain necessary accounting controls. The budget process involves coordination among every department that is part of the company. Once the master budget is complete, the company can measure how actual performance compares with the budget.

    Completing this unit should take you approximately 5 hours.

    • Upon successful completion of this unit, you will be able to:

      • describe how budgets are used for planning and controlling operations;
      • explain the process of establishing budgets;
      • develop the components of a master budget, including multiple schedules;
      • describe operating budgets for merchandising, service, and not-for-profit organizations; and
      • analyze ethical issues in creating operating budgets.

    • 6.1: The Budget Process

      • How Are Operating Budgets Created? URL

        Read the introduction and section 9.1.

      • The Budgeting Process URL

        Jerry's Ice Cream knows that a good budget results from consulting with all levels of the company and having a well-rounded budget committee to prepare the master budget. All levels of the company must share in creating the master budget and be prepared to implement it fully. 

        Budgeting is vital to the planning and controlling phases of the management cycle. For a company that has ends its fiscal year on December 31, the budgeting process may start as early as August.

    • 6.2: The Master Budget

      • The Master Budget URL

        Read from section 9.3 through the rest of chapter 9. The master budget for Jerry's Ice Cream has numerous schedules, including budget schedules for sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative, the income statement, capital expenditures, cash, and the balance sheet. The sales budget is most important because sales projections drive the other budgets.

        To get the most out of this unit, you should attempt to recreate your own master budget for Jerry’s Ice Cream. If you are going to use Excel, each schedule should be a separate sheet. Be sure to include all sums and linkages as you prepare your own master budget.

    • 6.3: Budgeting in Nonmanufacturing Organizations

      • Budgeting in Nonmanufacturing Organizations URL

        The examples we have used so far to describe a master budget have been limited to manufacturing companies. Manufacturing companies tend to have comprehensive operating budgets and therefore serve as a good starting point in learning how to develop a master budget. However, all types of organizations use operating budgets. This section describes operating budgets for merchandising, service, and not-for-profit organizations.

    • 6.4: Ethical Issues in Creating Operating Budgets

      • Ethical Issues in Creating Operating Budgets URL

        This section considers the inherent conflict that can exist between the planning and control phases of budgeting. During the planning phase, organizations are most concerned about getting accurate estimates that lead to positive results. The control phase requires evaluating the performance of CEOs, managers, and employees by comparing actual results to the operating budget. CEOs, managers, and employees often must decide between doing what is best for them and what is best for the organization.

    • Unit 6 Assessment

      • Unit 6 Assessment Quiz

        Take this assessment to see how well you understood this unit.

        • This assessment does not count towards your grade. It is just for practice!
        • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
        • You can take this assessment as many times as you want, whenever you want.

    • Unit 6 Conclusion

      In this unit, you learned how to develop a master budget, which starts with recognizing the importance of the process and the involvement of everyone in the company. The master budget is composed of several schedules, and all of those schedules interlock and are important. A critical schedule is the sales schedule. It drives all other schedules and possibly involves the greatest uncertainty since predicting sales into the future requires assumptions about many variables. A good master budget is essential to a well-run business. In Unit 7, you will learn how to make the master budget into a flexible living document that accommodates change as it happens and promotes good managerial decisions and control.