Section A Planning and Budgeting Concepts 6) Sometimes, this control will result in the revision of prior plans and goals or in formulation of new plans, changes in operations and revisions to the budget. For example, if changes occur in the companys external environment that cause variances in revenues and/or costs to become extreme, a new short-term plan and a revised budget covering the remainder of the year may be necessary in order to properly respond to the changes occurring. 7) Changed conditions during the year will be used in planning for the next period. For example, if sales decline, the company may plan changes in its product line for the next period in order to reverse the trend. The master budget is the culmination and the goal of the budgeting process. The master budget is a summarized set of budgeted financial statements, including budgeted balance sheet, budgeted income statement, and budgeted statement of cash flows. A projected financial statement is called a pro forma financial statement; however, the master budget is not called a pro forma financial statement. The term pro forma is used to refer to a forecasted financial statement prepared for a specific purpose, for example to do what if analysis in the process of planning. A company might prepare many different sets of pro forma financial statements for the same period in its planning process. A pro forma financial statement is not used for formal variance reporting as the master budget and the flexible budget are, although if an action that was forecasted is implemented, the company would probably want to compare the actual results with the forecasted, pro forma, ones. But pro forma financial statements are not a part of the formal budgeting process. They are used for planning and decision making purposes, and the amounts in them may be quite different from the amounts in the master budget. Planning and the use of pro forma financial statements is discussed more in the topic of Top-Level Planning and Analysis in this section. The master budget is prepared for just one activity level, and the activity level used is whatever it is projected to be before the period begins. When flexible budgeting is used, the flexible budget is also prepared for just one activity level, but that activity level is the actual activity level achieved during the period. Therefore, the flexible budget amounts cannot be finalized for a reporting period (usually a month at a time) until the period is past and the actual achieved activity level for that period is known. The master budget and the flexible budget will be discussed in detail in the section on Budget Methodologies. The master budget is created using both non-financial and financial assumptions, which come about as a result of the planning process. For instance, companies develop budgets for the number of units of each product that they expect to manufacture and sell, the number of employees they will need, and so forth. The master budget is a result of both operating and financing decisions. Operating decisions are concerned with the best use of the companys limited resources. Financing decisions are concerned with obtaining the funds to acquire the resources the company needs. A budget that is broken down according to departmental lines will provide more feedback and function as more of a control tool than one that is not departmentalized, because each department manager will be responsible for meeting his or her departments budget. Ideally, each department manager will also have been responsible for developing his or her departments budget. These underlying budgets are used in developing the master budget. The master budget is the consolidation of all the departmental budgets. It comprises operating budgets and financial budgets. Operating budgets are used to identify the resources that will be needed to carry out the planned activities during the budget period, such as sales, services, production, purchasing, marketing, and R & D. The operating budgets for individual units are compiled into the budgeted income statement. Financial budgets identify the sources and uses of funds for the budgeted operations. Financial budgets include the cash budget, budgeted statement of cash flows, budgeted balance sheet, and the capital expenditures budget.
Posted on: Mon, 17 Mar 2014 08:16:15 +0000
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