Chapter 13

The Master Budget

 Learning Objectives
Chapter 13

•Assess the importance of budgeting.

•Prepare a master budget.
•Discuss the uses of a rolling budget.
•Explain how standard costs are used in preparing
budgets and assessing responsibility.
•Calculate material and labor variances for
purposes of control and performance evaluation.

Chapter 13 2
 Budgeting
The process of budgeting is the interpretation
of future plans into monetary amounts so that
progress toward organizational goals can be
determined.

A budget is a financial plan for the future .

Chapter 13 3
Ways of Budgeting
Top Down

Participatory

Chapter 13 4
 Master
Master Budget
Budget
Cash Budget
Operating Budgets Cash Collections from Sales
Sales Budget Cash Payments for Purchases
Production Budget
Purchases Budget
Direct Labor Budget Budgeted Financial Statements
Overhead Budget Cost of Goods Manufactured
Capital Budget Income Statement
Balance Sheet
Statement of Cash Flows
Chapter 13 5
Flow of Budgeted Information through
the Master Budget

Chapter 13 6
 Fast-Food Funthings Projected
Balance Sheet December 31, 2009
In order to prepare the master budget for the first quarter of
2010, we need the December 31, 2009 balance sheet.

Chapter 13 7
 Sales Budget
The sales budget is prepared in both units and dollars.

Chapter 13 8
 Production Budget
The production budget is used to calculate how many items
need to be manufactured in a particular period.

Chapter 13 9
 Purchases Budget
The purchases budget is prepared to determine quantities of
raw material to buy to complete the budgeted production,
given the quantities of material in the beginning and ending
Direct Material Inventory.

Chapter 13 10
 Direct Labor Budget
Given expected production, direct labor requirements are
calculated on the direct labor budget.

Chapter 13 11
 Overhead Budget
The overhead budget is used to compute overhead costs for budgeted
production levels.
Fast-Food Funthings has chosen to combine its production overhead
budget and its selling and adm. budget into a single overhead budget.

Chapter 13 12
 Capital Budget
If the company plans to make any purchases of plant assets
during the master budget period, those amounts are included
in a capital budget.

Chapter 13 13
 Information for the Cash Budget
After all the preceding budgets have been developed, a cash
budget can be constructed.

However, the sales and purchases budgets must first be

converted to a cash basis before the cash budget can be
prepared.

We need to prepare two schedules:

•Schedule of Cash Collections from Sales
•Schedule of Cash Payments for Purchases
These schedules are shown on the following slides.

Chapter 13 14
Schedule of Cash Collections
from Sales

Chapter 13 15
Schedule of Cash Payments for
Purchases

Chapter 13 16
Cash Budget

Chapter 13 17
 Budgeted Financial Statements
The last component of the master budget is the preparation of
pro forma financial statements for the period.

Fast-Food Funthings prepares the following budgeted

financial statements:

•Pro Forma Cost of Goods Manufactured Schedule

•Pro Forma Income Statement
•Pro Forma Balance Sheet
•Pro Forma Statement of Cash Flows

Chapter 13 18
Pro Forma Cost of Goods Manufactured Schedule

19
Chapter 13
Pro Forma Income Statement

Chapter 13 20
Pro Forma Balance Sheet

Chapter 13 21
Pro Forma Statement of Cash Flows

Chapter 13 22
 Variance Analysis
A standard is simply a norm or average.
A standard cost is the budgeted cost to make
one unit of product (or perform one unit of
service).
Variance analysis is the process of
determining the standard-to-actual differences
and assessing whether that difference is
favorable or unfavorable.
Chapter 13 23
 Material Variances
Material variances indicate how close actual material usage
and cost were to standard material usage and cost.
We will calculate two variances for direct materials:
a.MATERIAL PRICE VARIANCE
b.MATERIAL QUANTITY VARIANCE
To calculate material variances, three costs are needed:

Chapter 13 24
 Material Variances
Material variances indicate how close actual material usage
and cost were to standard material usage and cost.
We will calculate two variances for direct materials:
a.MATERIAL PRICE VARIANCE
b.MATERIAL QUANTITY VARIANCE
To calculate material variances, three costs are needed:

Chapter 13 25
Material Variance Calculations

Chapter 13 26
Material Variances for Fast-Food
Funthings

Chapter 13 27
Labor Variance Calculations

Chapter 13 28
 Labor Variances for Fast-Food
Funthings
Labor variances are analyzed in a similar manner to materials
variances.
We will calculate two variances for direct labor:
a.LABOR RATE VARIANCE
b.LABOR EFFICIENCY VARIANCE

Chapter 13 29