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
Read the introduction to Chapter 9. When you have finished, click on the link at the top right to go to the next section and read "9.1 Planning and Controlling Operations."
Jerry’s Ice Cream knows that a good budget is the result of consulting with all levels of the company and having a well-rounded budget committee to prepare the master budget. As a planning document, it is essential that all levels of the company share in the creation of the master budget and are prepared to fully implement it.
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 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 using Microsoft Excel. Furthermore, watch the series of videos below for more practice with master budgets.
Note this is an extensive section of Chapter 9 with five subsections that are unnumbered in the text. They are:
- Sales and Production Budgets
- Direct Materials Purchases Budget
- Selling and Administrative Budget
- Capital Expenditures Budget /Cash Budget and
- Budgeted Balance Sheet.
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.
- Sales and Production Budgets
6.3: Budgeting in Nonmanufacturing Organizations
- Managerial Accounting, v1.0: "Chapter 9, Section 4: Budgeting in Nonmanufacturing Organizations" URL
The examples used thus 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
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 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 Conclusion
In this unit, you have learned to develop a master budget. It starts with recognizing the importance of the process and the involvement of all strata of the company. The master budget is composed of several schedules. All schedules interlock and are important. A critical schedule is the sales schedule as it drives all other schedules, and it involves possibly the greatest amount of uncertainty, as 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.