Financial and Management accounting II
Training 1: Chapter 7 Introduction to budgets and preparing the master budget
Budget: A detailed financial overview of the planned operations, goals and objectives of the
company. A plan about obtaining an using resources.
Budgeting: The process of formulating an organization’s plans.
Benefits of budgeting:
Budgeting forces managers to spend time on planning. To prepare a budget managers should
set objectives (the destination point) and use budgets as mapping roads to achieve the
objectives.
Budgeting provides an opportunity for managers to reevaluate existing activities and
evaluate possible new activities. Sometimes organizations assume in their budget that the
current activities will be the same as the previous period. Zero-base budget: When
organizations assume that the activities will not automatically be continued. Organizations
must think about whether to add, delete or modify activities.
Budgeting helps managers in communicating objectives and coordinating actions across the
organization.
Potential problems in implementing budgets:
When employees don’t except the budget or take low responsibility for it, the budget will be
less effective. The employees have to be involved and have to agree the budget for them to
do their work.
Budgets can cause managers to lie and cheat in the budget process. For example: If you give
managers bonuses based on the revenue they make, it can cause the managers to cheat and
lie about their made revenues to get the bonuses. Budgetary slack: The overstatement of
costs or understatement of revenue to create a goal that is easier to achieve.
Difficulties in obtaining accurate sales forecasts. The sales budget is the ground of the budget
and when this isn’t correct it can have an negative impact on the budget.
Sales forecast= A prediction of the amount of sales you will have under a given set of conditions.
Sales budget= What you plan to sell. (when you get the money is irrelevant)/ Your expected
revenues. When you send the invoice, regardless of when it gets paid.
Cash collections= When you receive the cash from you customers.
Factors to consider when forecasting sales:
General economic conditions.
Competitors actions/ plans.
Changes in the firms prices.
Changes in the product mix. Are there any new products?
Advertising and sales promotion plan. Advertising and sales promotion plans can gain a lot or
revenue if they are really good.
Market research studies. How is the market going to be? Increasing demand or decreasing
demand?
Past patterns of sales.
Estimates made by sales team.
Root cause analysis: An analysis to find out why the budget isn’t the same as the reality.
1
, Financial and Management accounting II
Training 2: Chapter 7 Introduction to budgets and preparing the master budget
There are different types of budgets:
Strategic plan: The overall goals and objectives of the organization.
Long-range plan: Forecasted financial statements for 5 to 10 years. For example, decisions about
adding or removing product lines, design and location of new plants, acquisitions (overnames)…
Capital budget: A budget that shows the planned expenses for long term investments such as
facilities, equipment, new products.
Managers align their long-term plan with their capital budget.
Master budget: A detailed analysis of the first year of the long-range plan. It summarisezs the
planned activities of all subunits of an organization, such as sales, production, scm, finance
department and HR department.
Continuous budget: A form of a master budget where at the end of each month the organization
forecast the budget of the next month. For example, at the end of February you forecast the budget
for march.
The master budget consist of:
Operating budget (profit plan): A detailed projection of what a company expects its revenue
and expenses will be over a period of time.
Financial budget: Focuses on the effects that the operating budget and other plans will have
on cash balances. How do all the balance sheets change from the beginning of the period to
the end of the period.
2
, Financial and Management accounting II
Step 1 preparing the basic data: (Supporting data)
A. Sales budget: How much sales you expect to make.
B. Cash collections from customers: When organization is going to collect the cash from the
customers.
C. Purchase budget and costs of sold goods: How much inventory you have to buy every
month. The cosg + beginning inventory (the unsold inventory of the last period)
Calculation of the purchase budget=
Step 1 Ending inventory= Beginning inventory + purchases – sold products
Step 2 Purchases/ purchase budget (the amount you have to order.)= Total needed ending
inventory + cogs -beginning inventory
D. Disbursements for purchases (uitbetalingen voor aankopen): When the organization has to
pay the things they have bought.
E. Operating expenses= All the other costs than cogs such as:
- Operating costs influenced by the sales volume: sales commissions and most of the
delivery expenses.
- Operating costs not influenced by the sales volume: rent, salaries, depreciation and,
insurance.
F. Disbursements for purchases: When the operating expenses will be paid by the organization.
G. Borrowing, repayment, and interest calculations for bank loan
Sales budget schedule:
June July August
Cash $200 $100 $300
Credit $100 $300 $200
Total $300 $400 $500
Cash collection budget schedule:
All credit gets collected in the following month.
June July August
Collection previous - $100 $300
month
Cash collection $200 $100 $300
current month
3
Training 1: Chapter 7 Introduction to budgets and preparing the master budget
Budget: A detailed financial overview of the planned operations, goals and objectives of the
company. A plan about obtaining an using resources.
Budgeting: The process of formulating an organization’s plans.
Benefits of budgeting:
Budgeting forces managers to spend time on planning. To prepare a budget managers should
set objectives (the destination point) and use budgets as mapping roads to achieve the
objectives.
Budgeting provides an opportunity for managers to reevaluate existing activities and
evaluate possible new activities. Sometimes organizations assume in their budget that the
current activities will be the same as the previous period. Zero-base budget: When
organizations assume that the activities will not automatically be continued. Organizations
must think about whether to add, delete or modify activities.
Budgeting helps managers in communicating objectives and coordinating actions across the
organization.
Potential problems in implementing budgets:
When employees don’t except the budget or take low responsibility for it, the budget will be
less effective. The employees have to be involved and have to agree the budget for them to
do their work.
Budgets can cause managers to lie and cheat in the budget process. For example: If you give
managers bonuses based on the revenue they make, it can cause the managers to cheat and
lie about their made revenues to get the bonuses. Budgetary slack: The overstatement of
costs or understatement of revenue to create a goal that is easier to achieve.
Difficulties in obtaining accurate sales forecasts. The sales budget is the ground of the budget
and when this isn’t correct it can have an negative impact on the budget.
Sales forecast= A prediction of the amount of sales you will have under a given set of conditions.
Sales budget= What you plan to sell. (when you get the money is irrelevant)/ Your expected
revenues. When you send the invoice, regardless of when it gets paid.
Cash collections= When you receive the cash from you customers.
Factors to consider when forecasting sales:
General economic conditions.
Competitors actions/ plans.
Changes in the firms prices.
Changes in the product mix. Are there any new products?
Advertising and sales promotion plan. Advertising and sales promotion plans can gain a lot or
revenue if they are really good.
Market research studies. How is the market going to be? Increasing demand or decreasing
demand?
Past patterns of sales.
Estimates made by sales team.
Root cause analysis: An analysis to find out why the budget isn’t the same as the reality.
1
, Financial and Management accounting II
Training 2: Chapter 7 Introduction to budgets and preparing the master budget
There are different types of budgets:
Strategic plan: The overall goals and objectives of the organization.
Long-range plan: Forecasted financial statements for 5 to 10 years. For example, decisions about
adding or removing product lines, design and location of new plants, acquisitions (overnames)…
Capital budget: A budget that shows the planned expenses for long term investments such as
facilities, equipment, new products.
Managers align their long-term plan with their capital budget.
Master budget: A detailed analysis of the first year of the long-range plan. It summarisezs the
planned activities of all subunits of an organization, such as sales, production, scm, finance
department and HR department.
Continuous budget: A form of a master budget where at the end of each month the organization
forecast the budget of the next month. For example, at the end of February you forecast the budget
for march.
The master budget consist of:
Operating budget (profit plan): A detailed projection of what a company expects its revenue
and expenses will be over a period of time.
Financial budget: Focuses on the effects that the operating budget and other plans will have
on cash balances. How do all the balance sheets change from the beginning of the period to
the end of the period.
2
, Financial and Management accounting II
Step 1 preparing the basic data: (Supporting data)
A. Sales budget: How much sales you expect to make.
B. Cash collections from customers: When organization is going to collect the cash from the
customers.
C. Purchase budget and costs of sold goods: How much inventory you have to buy every
month. The cosg + beginning inventory (the unsold inventory of the last period)
Calculation of the purchase budget=
Step 1 Ending inventory= Beginning inventory + purchases – sold products
Step 2 Purchases/ purchase budget (the amount you have to order.)= Total needed ending
inventory + cogs -beginning inventory
D. Disbursements for purchases (uitbetalingen voor aankopen): When the organization has to
pay the things they have bought.
E. Operating expenses= All the other costs than cogs such as:
- Operating costs influenced by the sales volume: sales commissions and most of the
delivery expenses.
- Operating costs not influenced by the sales volume: rent, salaries, depreciation and,
insurance.
F. Disbursements for purchases: When the operating expenses will be paid by the organization.
G. Borrowing, repayment, and interest calculations for bank loan
Sales budget schedule:
June July August
Cash $200 $100 $300
Credit $100 $300 $200
Total $300 $400 $500
Cash collection budget schedule:
All credit gets collected in the following month.
June July August
Collection previous - $100 $300
month
Cash collection $200 $100 $300
current month
3
