ACCT2002 Chap.7 The Master Budget and Responsibility Accounting
The Master Budget and Responsibility Accounting
The master budget translates strategy into a coordinated set of operating and financial schedules. Sales assumptions drive production or service capacity, which drives resource purchases, labour, overhead, cash and projected statements. The schedules are linked, so a local change propagates through inventory, financing and performance targets.
This chapter develops the budgeting cycle, operating-budget sequence, cash planning, sensitivity analysis and responsibility accounting. It also treats the human side: participation can improve information and commitment, but slack, imposed targets and uncontrollable items can distort behaviour. Responsibility reports should match the authority of the manager being evaluated and should separate learning from blame.
What this chapter covers
- 01
Budgets, plans and the budgeting cycle
- 02
Benefits and limits of the master budget
- 03
Sales, production and inventory schedules
- 04
Direct-material, labour and overhead budgets
- 05
Cash budget and budgeted statements
- 06
Sensitivity and scenario analysis
- 07
Responsibility centres and controllability
- 08
Participation, slack and multinational challenges
Connect sales, production and materials purchases
- 3Desired July ending finished goods are 20% × 6,200 = 1,240 units. July production is 5,000 sales + 1,240 ending − 1,100 beginning = 5,140 units.
- 2For the material ending policy, first derive August production. If September sales are not supplied, the August ending inventory cannot be calculated; therefore the stated data are insufficient for a unique materials-purchases answer.
- 3This is a deliberate completeness check: August production needs depend on August sales, desired August ending finished goods and beginning August inventory. Only two are known.
- 2July material required for production is known: 5,140 × 3 = 15,420 kg. Purchases would equal 15,420 + desired ending material − 2,300 once the missing August-production input is confirmed.
Key terms
- Master budget
- The coordinated collection of operating and financial budgets for a period.
- Operating budget
- Schedules dealing with revenue, production or service delivery and operating costs.
- Financial budget
- Cash, capital and projected financial-position schedules that reflect financing needs.
- Responsibility centre
- An organisational segment whose manager is accountable for specified activities and results.
- Controllability
- The degree to which a manager can influence an item during the evaluation horizon.
- Budgetary slack
- Intentional understatement of revenue or overstatement of cost to make a target easier to achieve.
- Sensitivity analysis
- Recalculation of budget outcomes when one or more assumptions change.
The Master Budget and Responsibility Accounting FAQ
Which budget is prepared first?
The sales or demand budget usually initiates the operating sequence because it drives production, staffing or service capacity. Constraints can require iteration rather than a strictly one-way process.
Why is the cash budget separate from profit?
Revenue and expense recognition do not necessarily occur when cash is received or paid. Inventory, credit terms, capital purchases and financing create timing differences.
What makes a responsibility report fair?
It should compare results with a relevant benchmark, distinguish controllable from non-controllable influences and match the manager's authority and time horizon.
Why can participation both help and hurt?
Local managers may contribute better information and accept targets more readily, but information asymmetry can also create budgetary slack. Review and dialogue matter.
Exam move
Build budgets as linked schedules rather than isolated formulas. Draw arrows from sales to production, resources, cash and projected statements; then shock one assumption and trace every affected schedule. Check inventory policies carefully because they pull next-period information into the current period. For responsibility accounting, pair each metric with the decision rights of the manager.
In oral practice, explain one behavioural benefit and one behavioural risk of participation without assuming either dominates.
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