Budgeting Overview and Steps in the Budgeting Process

After individual amounts are posted to the cash budget, income statement, and balance sheet, the income statement is completed. The income tax liability is posted to the cash budget, and it is completed as described in step 2 above. Specific steps in posting amounts to the pro formas are discussed next.

Manufacturing Budget

Most importantly, operations management and shop floor personnel need to internalize their budgets. Top management must convey the perception that the operating budgets belong to the managers who create master budget them. This is difficult because the master budgeting process is iterative. Often, once the master budget is prepared, it undergoes a number of revisions before agreement is reached on a final plan.

Overlooking Key Expenses

Creating a direct labor budget is a necessary step for businesses involved in production. For short-term planning, you can simply multiply the number of units to be sold from each product times their price. Keep in mind that both quantity and price estimates for the future depend on the company’s strategy and objectives. Suppose that you are part of a team that is responsible for creating ABC Corporation’s Master Budget.

Master budget process

In the first three steps, the enterprise’s mission, objectives, and goals are defined. The environment is decomposed into internal strengths and weaknesses and external opportunities and threats (SWOT). In step 5, strategies are set to capitalize on strengths and opportunities, and overcome weaknesses and threats. Finally, in step 6, results are compared against budget in a real-time mode for operational control and in formal variance reports for performance evaluation. The foregoing budgeting steps can also be used in preparing the operating budget in merchandising and service firms.

Use Metrics to Measure Progress

The variances are classified as either favorable or unfavorable. This process can be challenging if too many customers are past-due. To compensate for this, many businesses create something called an “allowance for doubtful accounts,” which estimates the amount of accounts receivable that are expected to not be collectible. If you run a one- or two-person business, it’s likely you’ll be doing most of the prep work yourself. However, if you have sales or production managers, be sure to get them involved in the budget creation process as well. Master budgets usually reflect totals for the upcoming year, with budgeted amounts entered into a standard monthly or quarterly budget format.

Market research predicts that the first company to develop this product will be a star.
Progress toward goal achievement is measured by the management accounting system and other information systems (manufacturing and marketing LANs, for example)2.
It is in a position to pay back the entire balance on its line-of-credit.
Therefore, overhead cost equations are needed for each overhead resource, activity, service center, and production department.
Noncash items are subtracted from fixed administrative expenses because only cash-paid costs should appear on the cash budget.

17.7 List 4 functional roles of the management accountant in a strategic planning and master budgeting process. Direct materials purchases budget A statement used by manufacturing firms that shows how much and when direct materials should be purchased, and when they will be paid. Exhibit 17-1 lists six steps in the strategic planning process.