December 8, 2011

The Master Budget - Accounting Information

Budgets are the output of the planning information. They become the standards or targets for control function of management. Accountants prepare the final versions of budgets and collect accounting information to present periodical reports on budgeted versus actual performance.

Budgeting is the most widely used accounting tool for planning and controlling organizations.

A budget is a formal quantitative expression of management's plan of action for a future time period and it acts as the coordination and implementation device. The budget can include both financial and nonfinancial aspects of operating and financial plans.

The master budget of a company is a comprehensive expression of management's operating and financial plans for a future time period (usually a year) that is summarized in a set of budgeted financial statements. Some organizations use the term "pro forma statements" for budgeted statements. Some firms refer to budgeting as targeting. Many companies prepare budgeted income statement, balance sheet and statement of cash flow as the summarized budget statements.

Advantages of Budgets

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departments of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).

Steps in Developing an Operating Budget

1. Prepare the revenues budget
2. Prepare the production budget
3. Prepare the direct materials usage budget and direct materials 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 good sold budget
8. Prepare the nonmanufacturing costs budget.
9. Prepare the budgeted income statement

Responsibility Accounting

While a master budget includes all revenues and expenses an organization earns and incurs, statements that assess the responsibility of a manager need to highlight the revenues and expenses under the control of the manager.

Controllability and responsibility are important concepts in this regard.

Controllability is the degree of influence that a specific manager has over costs, revenues, or other items in question.

Originally posted at

No comments:

Post a Comment