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Chapter 6: Problem 2

Define master budget.

Short Answer

Expert verified
A master budget is a comprehensive financial plan that integrates all individual budgets, aiding in planning and controlling organizational activities for a specific period.

Step by step solution

01

Understanding the Concept

A master budget is a comprehensive financial planning document that includes all the individual budgets related to sales, production, materials, labor, overhead, selling and administrative expenses, and capital expenditures. It serves as a roadmap for managing the company's activities during a specific period, usually a fiscal year.
02

Components of a Master Budget

The master budget is composed of several key components: the operating budget (which includes sales, production, direct materials, direct labor, overhead, and selling/administrative budgets) and the financial budget (comprising the budgeted income statement, budgeted balance sheet, and cash flow budget). Each component interrelates to give a complete financial overview.
03

Purpose of a Master Budget

The main purpose of a master budget is to provide a structured way to plan and control the financial activities of an organization. It helps managers align the company's strategies with its resources, track performance, anticipate cash flow needs, and set financial targets and constraints to guide decision-making.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Financial Planning
Financial planning is akin to crafting the blueprint for a successful business journey. It involves setting financial goals, projecting future earnings, and outlining strategies to achieve these objectives. In the context of a master budget, financial planning starts by understanding the company鈥檚 strategic vision and translating it into measurable financial targets.

Key elements often include:
  • Revenue Forecasting: Estimating future sales based on market conditions and historical data.
  • Expense Planning: Identifying costs associated with operations, production, and administration.
  • Profit Goals: Setting targets for profits to ensure the business remains viable and competitive.
Effective financial planning not only prepares a company for the future but also enables it to adapt to changes with agility.
Operating Budget
The operating budget forms the core of the master budget, focusing on the day-to-day operations of a business. It details how a company plans to earn revenue and incur expenses over a specific period. This budget includes several interconnected components, such as:
  • Sales Budget: Predicts how much your company expects to sell, serving as a starting point for other budgets.
  • Production Budget: Plans the number of units to produce, ensuring sufficient stock to meet sales demands.
  • Direct Materials and Labor Budgets: Estimate the costs needed for producing the planned output.
  • Overhead Budget: Encompasses all other production costs that are neither material nor labor.
  • Selling and Administrative Budget: Covers non-production costs such as marketing and office expenses.
All these components must synchronize to keep the business ticking smoothly, ensuring efficient use of resources and maintaining operational effectiveness.
Financial Budget
The financial budget focuses on the financial resources needed to support the operating budget. It provides important insights into cash flows and the overall financial standing of a company. Here are its core elements:
  • Budgeted Income Statement: Projects profits and losses, indicating how much income the company expects after covering all expenses.
  • Budgeted Balance Sheet: Forecasts the company鈥檚 financial position at the end of the budgeting period.
  • Cash Flow Budget: Tracks the cash expected to flow in and out of the business, identifying potential shortages or surpluses.
By emphasizing resource allocation and liquidity management, the financial budget ensures that the organization can meet its financial obligations while pursuing growth opportunities.
Budget Control
Budget control is the process of monitoring and managing financial resources to ensure that the organization meets its financial plans. By comparing actual financial performance against the budget, managers can identify variances and take corrective actions.

The process involves:
  • Variance Analysis: Assessing the differences between budgeted and actual figures.
  • Performance Review: Evaluating financial results to gauge how well the company is sticking to its budget.
  • Feedback and Adjustment: Making necessary changes to strategies or operations based on analysis.
Effective budget control helps businesses remain on track towards their financial goals by ensuring that resources are used efficiently and adjustments are made promptly in response to internal and external changes.

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Most popular questions from this chapter

The Suzuki Co. in Japan has a division that manufactures two-wheel motorcycles. Its budgeted sales for Model \(G\) in 2013 is 900,000 units. Suzuki's target ending inventory is 80,000 units, and its beginning inventory is 100,000 units. The company's budgeted selling price to its distributors and dealers is 400,000 yen ( \(楼\) ) per motorcycle. Suzuki buys all its wheels from an outside supplier. No defective wheels are accepted. (Suzuki's needs for extra wheels for replacement parts are ordered by a separate division of the company.) The company's target ending inventory is 60,000 wheels, and its beginning inventory is 50,000 wheels. The budgeted purchase price is 16,000 yen ( \(楼\) ) per wheel. 1\. Compute the budgeted revenues in yen. 2\. Compute the number of motorcycles to be produced. 3\. Compute the budgeted purchases of wheels in units and in yen.

'Budgeted performance is a better criterion than past performance for judging managers." Do you agree? Explain.

Game Guys is a retail store selling video games. Sales are uniform for most of the year, but pick up in June and December, both because new releases come out and because games are purchased in anticipation of summer or winter holidays. Game Guys also sells and repairs game systems. The forecast of sales and service revenue for the second quarter of 2012 is as follows: Almost all the service revenue is paid for by bank credit card, so Game Guys budgets this as \(100 \%\) bank card revenue. The bank cards charge an average fee of \(3 \%\) of the total. Half of the sales revenue is also paid for by bank credit card, for which the fee is also \(3 \%\) on average. About \(10 \%\) of the sales are paid in cash, and the rest (the remaining \(40 \%\) ) are carried on a store account. Although the store tries to give store credit only to the best customers, it still averages about \(2 \%\) for uncollectible accounts; \(90 \%\) of store accounts are paid in the month following the purchase, and \(8 \%\) are paid two months after purchase. 1\. Calculate the cash that Game Guys expects to collect in May and in June of 2012 . Show calculations for each month. 2\. Game Guys has budgeted expenditures for May of \(\$ 4,350\) for the purchase of games and game systems, \(\$ 1,400\) for rent and utilities and other costs, and \(\$ 1,000\) in wages for the two part time employees. a. Given your answer to requirement 1 , will Game Guys be able to cover its payments for May? b. The projections for May are a budget. Assume (independently for each situation) that May revenues might also be \(5 \%\) less and \(10 \%\) less, and that costs might be \(8 \%\) higher. Under each of those three scenarios show the total net cash for May and the amount Game Guys would have to borrow if cash receipts are less than cash payments. Assume the beginning cash balance for May is \(\$ 100\). 3\. Suppose the costs for May are as described in requirement 2, but the expected cash receipts for May are \(\$ 6,200\) and beginning cash balance is \(\$ 100 .\) Game Guys has the opportunity to purchase the games and game systems on account in May, but the supplier offers the company credit terms of \(2 / 10\) net \(30,\) which means if Game Guys pays within 10 days (in May) it will get a \(2 \%\) discount on the price of the merchandise. Game Guys can borrow money at a rate of \(24 \%\). Should Game Guys take the purchase discount?

'Strategy, plans, and budgets are unrelated to one another." Do you agree? Explain.

Describe how nonoutput-based cost drivers can be incorporated into budgeting.
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