CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY
ACCOUNTING
LEARNING OBJECTIVES
1. Understand what a master budget is and explain its benefits
2. Describe the advantages of budgets
3. Prepare the operating budget and its supporting schedules
4. Use computer-based financial planning models in sensitivity analysis
5. Explain kaizen budgeting and how it is used for cost management
6. Prepare an activity-based budget
7. Describe responsibility centers and responsibility accounting
8. Explain how controllability relates to responsibility accounting

CHAPTER OVERVIEW
Chapter 6 describes a major feature of management planning and control systems, budgets. The
importance of satisfying customers and succeeding in the marketplace compels the use of a common
accounting tool for planning and controlling, budgeting. As noted in the chapter, “Few businesses plan to
fail, but many of those that flop, failed to plan.” The chapter describes how budgeting is used in
implementing plans developed through strategic planning, assisting managers in their planning function.
Chapter 7 will describe how budgets aid managers in their control function. The wise and skillful
administration of the budget is what gives budgets value because budgets, in themselves, are neither good
nor bad.
The report models used in budgeting are familiar, as they are the basic financial statements. The
statements are approached from a different perspective, as typically projected sales are the starting point
for preparing a budget. In costing systems studied in the previous two chapters, sales are the result of
operations rather than the beginning consideration. Preparation of an operating budget is illustrated. Cash
budgeting, a part of financial budgeting, is illustrated in the appendix to the chapter.
The theme of continuous improvement is featured through a description of kaizen budgeting. For
organizations that use activity-based costing and activity-based management, activity-based budgeting
works back through the activity-based costing system using the same defined activities and relationships.
Responsibility accounting is introduced as a means of coordinating the efforts of all employees in an

Summarizes financial projections of all of company’s budgets and plans

ii. Expresses management’s operating and financing plans with formalized outline of
financial objectives and how to attain
iii. Provides a tool that is neither good nor bad, but valuable when administered skillfully
b.

Pro forma statements: term used for budgeted financial statements

Do multiple choice 1 and 2.
Learning Objective 2:
Describe the advantages of budgets

76 Chapter 6

Assign Problem 6-31.


B. Advantages and benefits of budgeting: big part of most management control systems
(Prepared when expected benefits exceed expected costs)
1. Compels strategic planning and implementation of plans
a. Considers strategy questions integral to company’s strategic analysis
b. Effects both long-run and short-run planning
c. Provides feedback that can signal revisions to plan and possibly strategies
2. Provides framework for judging performance
a. Can overcome limitation of using past results that incorporate miscues and substandard
performance
b. Can overcome limitation of using past performance when future conditions may be
expected to differ from the past
3. Motivates managers and employees

1. Step 1: Prepare the revenues budget: usual starting point in budgeting
2. Step 2: Prepare the production budget (in units)
3. Step 3: Prepare the direct materials usage and purchases budgets
4. Step 4: Prepare the direct manufacturing labor budget
5. Step 5: Prepare the manufacturing overhead budget
6. Step 6: Prepare the ending inventories budget
7. Step 7: Prepare the cost of goods sold budget
8. Step 8: Prepare the nonmanufacturing costs budget
9. Step 9: Prepare the budgeted income statement [Exhibit 6-3] [Concepts in Action]
Do multiple choice 4 and 5.

Assign Exercises 6-17 through 6-19 and Problems 6-30 and 6-34.

Learning Objective 4:
Use computer-based financial planning models in sensitivity analysis
C. Computer-based financial planning models – assist in sensitivity analysis
Do multiple choice 6.

Assign Problem 6-29.

D. Variations [Exhibit 6-4]
Learning Objective 5:
Explain kaizen budgeting and how it is used for cost management
1. Kaizen budgeting: based on idea it is possible to continuously reduce costs over time
Do multiple choice 7.

Assign Exercise 6-25 (a continuation of 6-24—and of 5-24).

Learning Objective 6:
Prepare an activity-based budget


Learning Objective 8:
Explain how controllability relates to responsibility accounting
B. Controllability: degree of influence that a specific manager has over costs, revenues, and related
items for which responsible
1. Difficult to pinpoint
a. Few costs clearly under influence of one manager
b. Long enough time span, all costs come under somebody’s control
2. Emphasis on information and behavior
a. Responsibility focuses on whom to ask to obtain information, not on whom to blame
b. Performance reports may include uncontrollable items because could change behavior in
directions top management desire
Do multiple choice 10.

Assign Problem 6-32.

IV. Human aspects of budgeting—human factors are a crucial part of budgeting
V. Cash budgeting [appendix]
Do multiple choice 11 and 12. Assign Exercise 6-27 and Problem 6-35.

CHAPTER QUIZ SOLUTIONS: 1.d

2.a 3.b 4.d 5.c 6.b 7.c 8.a 9.d 10.b 11.c

12.b

Master Budget and Responsibility Accounting

79


Dewitt is projecting operating income for October 2002 in the amount of
a. $105,000.

b. $119,000.

c. $129,000.

d. $230,000.

3. Which of the following is not a major benefit of budgets?
a. compels planning
b. eliminates innovation

c. provides performance criteria
d. promotes coordination and communication

The following data apply to questions 4 and 5.
Hester Company budgets on an annual basis for its fiscal year. The following beginning and ending
inventory levels (in units) are planned for the fiscal year of July 1, 2001, through June 30, 2002.
Raw material1
Work in process
Finished goods
1

July 1, 2001
40,000
8,000
30,000

June 30, 2002

80 Chapter 6


d. Performs calculations that are mathematical representations of relationships in master budget
7. The major cost management concept used in kaizen budgeting is that of
a.
b.
c.
d.

eliminating inventories of every type but materials.
refinements in the indirect-cost categories for costing systems.
continuous improvement.
sensitivity analysis using computer-based financial planning models.

8. Activity-based budgeting for a setup activity would require budgeting costs
a.
b.
c.
d.

separately for the setup activity.
for the department in which the setup activity would occur.
on a per unit basis for the number of units involved in the setup.
separately for variable and fixed categories for the setup activity.

9. Which of the following statements does not describe responsibility accounting?
a.
b.
c.

$460,000

$150,000
400,000
$550,000

$120,000
280,000
$400,000

Management estimates that 5% of credit sales are not collectible. Of the credit sales that are collectible,
60% are collected in the month of sale and the remainder in the month following the sale. Cost of
purchases of inventory each month are 70% of the next month's projected total sales. All purchases of
inventory are on account; 25% are paid in the month of purchase, and the remainder is paid in the month
following the purchase.
11. [CMA Adapted] Brenton's budgeted total cash receipts in April are
a. $448,000.

b. $437,000.

c. $431,600.

d. $328,000.

12. [CMA Adapted] Brenton's budgeted total cash payments in March for inventory purchases are
a. $385,000.

b. $358,750.

c. $306,250.

people must make it happen over a period of time in a variety of environments. And even the nicest of
blueprints must give way to events and unforeseen circumstances. Blueprints, as initially developed, do
not often become floor plans. For who would not want to take advantage of having better materials used
or a slightly different design if the opportunity arose. An ancient proverb expresses some of the problem
in developing a budget, “Many a slip ‘twixt cup and lip.” It is not possible to plan for everything, and yet
the process of budgeting requires thinking about most things and incorporating all possibilities to the
extent they are cost/beneficial.
Computers have decreased the importance of technical number-crunching skills, allowing the focus to
shift to strategy and the human aspects of budgeting.

82 Chapter 6


3. Prepare the operating budget and its supporting schedules

Why is budgeting described as an accounting tool? Accounting is the language of business. A
language has conventions and structure that enable communication to take place. Budgets are a proposed
plan of action by management for a future time period for the business or organization as a whole. To
communicate ideas and criteria throughout the organization, language is necessary. Accounting provides
that communication tool—language. The advantages that budgets provide are those typical of a language.
The advantage of putting ideas into concrete plans, of expressing expectations into performance criteria,
and of making aspirations into common goals and objectives.
Accounting provides key information to managers for the purpose of making decisions. Information is
provided by means of language. Accounting is the language of business, using both financial and
nonfinancial terms.
4. Use computer-based financial planning models in sensitivity analysis

Sensitivity analysis was discussed in earlier chapters. How are these references
related? Sensitivity analysis was discussed in Chapter 3 for cost-volume-profit analysis. The technique
of examining how a result will change if the original predicted data are not achieved or if underlying



6. Prepare an activity-based budget

Aren’t activity-based costing and activity-based management enough without adding
activity-based budgeting too? Refer to Learning Objective 1 for description of the evolution of a
management control system. The text notes in the section on activity-based budgeting that the domain of
activity-based costing is the reporting and analysis of past and current costs. A natural extension is to use
an activity-based approach in the budgeting of future costs within an activity-based costing system. This
is an example of a management control system evolving.
7. Describe responsibility centers and responsibility accounting

How does the saying, “The whole is more than the sum of its parts,” apply to
responsibility accounting? Requiring budgets and reports from individual units within the larger
organization provides information useful for the whole. In preparing budgets, each unit must consider its
role in the larger organization and work toward coordinating efforts for achieving company goals as well
as individual goals. With the requirement of reporting activities by individual unit, individual feedback
can be linked with other units for comparison and evaluation. Careful and wise selection of individual
units can result in more effort toward achieving the organization’s goals, better information for making
decisions, and more useful performance reports. With each individual unit working to achieve its own
objectives and those of the overall organization, more can be accomplished. Energy to the organization is
lost if one group is working in a way that is counterproductive to the whole. Responsible accounting or
reporting can contribute to identifying such behavior.
8. Explain how controllability relates to responsibility accounting

How can it possibly be advantageous to an organization to hold a person responsible for
things beyond her/his control? The idea of holding a person responsible for costs or revenues for
which s/he has little or no control can be used to promote certain types of behavior, for eliciting
information, and to broaden perspective. The concept of what is “controllable” changes with time and
circumstance. To hold no one controllable is probably to have no control. To overemphasize


to FG units

Available
for use

or

− Ending
Goods sold

____________
FG units to
DM units

− Ending

____________

Units used

Master Budget and Responsibility Accounting

85


SUGGESTED READINGS
Birnberg, J., “The Role of Behavioral Research in Management Accounting Education in the 21 st
Century,” Issues in Accounting Education (November 2000) p.713 [16p].
Diehn, D., “Seven Steps to Build a Successful Collaborative Forecasting Process,” Journal of Business