ACT503 Chap.8 The Master Budget and Responsibility Accounting
The Master Budget and Responsibility Accounting
A chain in which every schedule inherits the one before it
The budget was introduced early in this course as the most important planning tool, defined as a plan restated in numbers and the instrument that makes the parts of a firm agree on what each will do to deliver it.
The master budget turns that definition into a set of linked schedules and splits in two: the operating budget, which ends in a budgeted income statement, and the financial budget, which covers capital spending, cash and the budgeted balance sheet. The order is not a convention.
Each schedule needs a quantity that only the schedule before it can supply, so a sales forecast that is ten per cent optimistic does not produce one optimistic figure; it produces an optimistic production plan, materials commitment and labour schedule, and a cash budget that understates the working capital tied up in stock that did not sell.
Two schedules with the same shape and different inputs
The production budget and the materials purchases budget are both built as what will be used, plus what should be left at the end, less what is there at the start.
The pattern is identical and the inputs are not: production starts from budgeted sales, while materials start from budgeted production. Driving materials off the sales figure is the commonest error in this area and it is silent, because the wrong figure is a plausible one.
A cash budget then puts timing back into a plan that the income statement removed, in four sections: cash available, disbursements, financing and the closing balance.
Depreciation appears in full in the budgeted income statement and never in the cash budget, and copying the overhead line across without that adjustment compounds across periods.
Responsibility accounting attaches the number to a person
Responsibility accounting reports plans and results by the centre that controls them, and the four kinds of centre differ only in how much of the result a manager answers for: a cost centre for costs, a revenue centre for revenues, a profit centre for both, and an investment centre for those plus the capital employed.
The choice is a statement about what a manager is allowed to decide, which is why it belongs to organisational design as much as to accounting. Controllability is the test that makes the system fair, and it is also the reason a budget prepared as though it were a forecast has no control value while a forecast treated as a budget punishes managers for events outside their control.
What this chapter covers
- 01
The master budget, and its operating and financial halves
- 02
Why every schedule inherits the sales forecast
- 03
Production budget: sales, plus closing, less opening
- 04
Materials usage and purchases, driven by production
- 05
Labour and overhead budgets, and the budgeted income statement
- 06
The four sections of a cash budget
- 07
Why depreciation appears in one statement and not the other
- 08
Forecasting against budgeting
- 09
Four responsibility centres and the controllability test
Build the production and materials budgets and name each input
- 3Production in units, from budgeted sales and the inventory policy.
- 2Materials usage, driven by production rather than by sales.
- 3Materials purchases in quantity and in value.
Key terms
- Master Budget
- The complete set of linked budget schedules for a period, splitting into an operating budget that ends in a budgeted income statement and a financial budget covering capital spending, cash and the budgeted balance sheet.
- Production Budget
- A schedule of units to be produced, computed as budgeted sales plus desired closing finished goods less opening finished goods. It is the input to every manufacturing cost budget that follows it.
- Cash Budget
- A schedule of cash available, disbursements, financing and the closing balance, which restores the timing that a budgeted income statement removes. Depreciation is excluded from it because nothing is paid.
- Responsibility Centre
- A part of an organisation whose manager answers for a defined part of the result. The four kinds are cost, revenue, profit and investment centres, and the choice states what the manager is allowed to decide.
- Controllability
- The principle that a manager should be evaluated on what the manager can influence, with everything else reported separately. It is the test that makes a responsibility report fair and usable.
- Budgetary Slack
- The margin a manager builds into a target by understating revenue or overstating cost, so that the target is easier to meet. It is the predictable consequence of using one set of figures as both a plan and a yardstick.
The Master Budget and Responsibility Accounting FAQ
Which figure drives the materials budget?
Budgeted production, never budgeted sales. Production is itself budgeted sales adjusted for the finished goods inventory policy, so the two differ whenever closing stock is not equal to opening stock. A materials budget built directly on the sales figure is short or long by the whole of that inventory movement, and the resulting figure looks entirely plausible on the page.
Why can a profitable plan still run out of money?
Because profit and cash are separated by credit given to customers, credit taken from suppliers and stock. A budgeted income statement recognises revenue when it is earned and cost when it is matched, while the cash budget records receipts and payments when they happen. The financing section is what makes the cash budget a decision rather than a forecast, since it shows what must be borrowed.
Is a budget the same thing as a forecast?
No. A forecast is a prediction of what will happen and a budget is a commitment to what the firm will do, which somebody is answerable for. A budget prepared as though it were a forecast has no control value, and a forecast treated as a budget holds managers to events outside their control. The distinction is what makes the second half of this chapter necessary.
How do I choose the right responsibility centre for a manager?
By the decision rights the manager actually holds. A manager who sets prices, chooses the range and hires staff influences both revenues and costs and belongs in a profit centre. Making that manager an investment centre would measure a return on capital that head office controls, so the figure would move with decisions the manager never made.
Exam move
Take one month of a small business you know and build its operating budget in order, writing beside each schedule the name of the schedule its quantities came from. Then deliberately change the sales figure by ten per cent and follow the error through. Seeing one number move six schedules is what makes the sequence stick, and it is also the answer to the most common examination question in this chapter.
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