CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1 The budgeting cycle includes the following elements:
a. Planning the performance of the company as a whole as well as planning the performance
of its subunits. Management agrees on what is expected.
b. Providing a frame of reference, a set of specific expectations against which actual results
can be compared.
c. Investigating variations from plans. If necessary, corrective action follows investigation.
d. Planning again, in light of feedback and changed conditions.
6-2 The master budget expresses management’s operating and financial plans for a specified
period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial
plan of what the company intends to accomplish in the period.
6-3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In
turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about
the likely effects of their strategic plans. Managers use this feedback to revise their strategic
plans.
6-4 We agree that budgeted performance is a better criterion than past performance for
judging managers, because inefficiencies included in past results can be detected and eliminated
in budgeting. Also, future conditions may be expected to differ from the past, and these can also
be factored into budgets.
6-5 Production and marketing traditionally have operated as relatively independent business
functions. Budgets can assist in reducing conflicts between these two functions in two ways.
Consider a beverage company such as Coca-Cola or Pepsi-Cola:
• Communication. Marketing could share information about seasonal demand with
production.
• Coordination. Production could ensure that output is sufficient to meet, for example,
high seasonal demand in the summer.
6-6 In many organizations, budgets impel managers to plan. Without budgets, managers drift
from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and
improve their performance. Thus, many top managers believe that budgets meet the cost-benefit
test.
6-7 A rolling budget, also called a continuous budget, is a budget or plan that is always
available for a specified future period, by continually adding a period (month, quarter, or year) to
the period that just ended. A four-quarter rolling budget for 2011 is superseded by a four-quarter
rolling budget for April 2011 to March 2012, and so on.
6-1
, 6-8 The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget
2. Prepare the production budget (in units)
3. Prepare the direct material usage budget and direct material purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement
6-9 The sales forecast is typically the cornerstone for budgeting, because production (and,
hence, costs) and inventory levels generally depend on the forecasted level of sales.
6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to
examine how budgeted amounts change with changes in the underlying assumptions. This assists
managers in monitoring those assumptions that are most critical to a company in attaining its
budget and allows them to make timely adjustments to plans when appropriate.
6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the
budget period into the budget numbers.
6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-
based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce
and sell products and services. Nonoutput-based cost drivers, such as the number of parts,
number of batches, and number of new products can be used with ABB.
6-13 The choice of the type of responsibility center determines what the manager is
accountable for and thereby affects the manager’s behavior. For example, if a revenue center is
chosen, the manager will focus on revenues, not on costs or investments. The choice of a
responsibility center type guides the variables to be included in the budgeting exercise.
6-14 Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
currency for reporting to shareholders, by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates, and where possible, plan
financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations. In developing budgets for operations in different countries, they must also have good
understanding of political, legal and economic issues in those countries.
6-15 No. Cash budgets and operating income budgets must be prepared simultaneously. In
preparing their operating income budgets, companies want to avoid unnecessary idle cash and
unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights
periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost
effective ways of either using excess cash or raising cash from outside to achieve the company’s
operating income goals.
6-2
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1 The budgeting cycle includes the following elements:
a. Planning the performance of the company as a whole as well as planning the performance
of its subunits. Management agrees on what is expected.
b. Providing a frame of reference, a set of specific expectations against which actual results
can be compared.
c. Investigating variations from plans. If necessary, corrective action follows investigation.
d. Planning again, in light of feedback and changed conditions.
6-2 The master budget expresses management’s operating and financial plans for a specified
period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial
plan of what the company intends to accomplish in the period.
6-3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In
turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about
the likely effects of their strategic plans. Managers use this feedback to revise their strategic
plans.
6-4 We agree that budgeted performance is a better criterion than past performance for
judging managers, because inefficiencies included in past results can be detected and eliminated
in budgeting. Also, future conditions may be expected to differ from the past, and these can also
be factored into budgets.
6-5 Production and marketing traditionally have operated as relatively independent business
functions. Budgets can assist in reducing conflicts between these two functions in two ways.
Consider a beverage company such as Coca-Cola or Pepsi-Cola:
• Communication. Marketing could share information about seasonal demand with
production.
• Coordination. Production could ensure that output is sufficient to meet, for example,
high seasonal demand in the summer.
6-6 In many organizations, budgets impel managers to plan. Without budgets, managers drift
from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and
improve their performance. Thus, many top managers believe that budgets meet the cost-benefit
test.
6-7 A rolling budget, also called a continuous budget, is a budget or plan that is always
available for a specified future period, by continually adding a period (month, quarter, or year) to
the period that just ended. A four-quarter rolling budget for 2011 is superseded by a four-quarter
rolling budget for April 2011 to March 2012, and so on.
6-1
, 6-8 The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget
2. Prepare the production budget (in units)
3. Prepare the direct material usage budget and direct material purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement
6-9 The sales forecast is typically the cornerstone for budgeting, because production (and,
hence, costs) and inventory levels generally depend on the forecasted level of sales.
6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to
examine how budgeted amounts change with changes in the underlying assumptions. This assists
managers in monitoring those assumptions that are most critical to a company in attaining its
budget and allows them to make timely adjustments to plans when appropriate.
6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the
budget period into the budget numbers.
6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-
based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce
and sell products and services. Nonoutput-based cost drivers, such as the number of parts,
number of batches, and number of new products can be used with ABB.
6-13 The choice of the type of responsibility center determines what the manager is
accountable for and thereby affects the manager’s behavior. For example, if a revenue center is
chosen, the manager will focus on revenues, not on costs or investments. The choice of a
responsibility center type guides the variables to be included in the budgeting exercise.
6-14 Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
currency for reporting to shareholders, by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates, and where possible, plan
financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations. In developing budgets for operations in different countries, they must also have good
understanding of political, legal and economic issues in those countries.
6-15 No. Cash budgets and operating income budgets must be prepared simultaneously. In
preparing their operating income budgets, companies want to avoid unnecessary idle cash and
unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights
periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost
effective ways of either using excess cash or raising cash from outside to achieve the company’s
operating income goals.
6-2
