The Complete CFO Handbook

Chapter 23. Master Budget

Agenda

Item 1	Explain the relation among the various sales, production, and expense budgets with the master budget.
Item 2	Identify the different types of budgeting systems.
Item 3	Identify the link among the production budget and the direct labor, direct materials, direct purchases, and the ending inventories budgets.
Item 4	Describe the linkages among the cash receipts and cash disbursements schedules and the cash budget.

A budget is a quantitative expression of management objectives and a means of monitoring progress toward achievement of those objectives. An effective budget must be aimed at the strategic targets of the company, as well as well‐coordinated with the company's management and accounting systems. In addition, an effective budget process includes a procedure for monitoring and making adjustments if necessary. For example, there must be a chart of accounts and a sound organization chart, which shows the responsibilities of each executive for whom a budget is justifed. Another important requirement for a good budget is a standard cost system.

Standard costs, the subject of the previous chapter, are the costs per unit that are expected to be achieved in a particular production process, whereas budgeted costs are the total costs expected to be incurred. A standard cost per unit may be likened to a single brick, whereas a budget represents an entire house.

For a budget to be effective, company offcials must fully understand their responsibilities in making ...