91 11.3 The Budgeting Process
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Last updated
- Dec 28, 2020
Learning Objectives
- Understand the process used to establish budgets.
Question: Some companies prefer to take a “top-down” approach to budgeting, in which upper management establishes the
Most organizations have a budget committee that supervises the budgeting process. A budget committee3 is a group within the organization responsible for overseeing and approving the master budget. A master budget4 is a series of budget schedules outlining the organization’s plans for the upcoming period (typically for a year and presented in monthly or quarterly time periods). The master budget can take many different forms but often includes schedules that provide planning for sales, production, selling and administrative expenses, and capital expenditures. These schedules lead to the budgeted income statement, cash flows, and balance sheet (also part of the master budget).
Figure 11.1 shows the components of the master budget with references to the figure in which we present each component for Jerry’s Ice Cream.
a See Figure 11.3 for the sales budget.
b See Figure 11.8 for the selling and administrative budget.
c See Figure 11.4 for the production budget.
d See Figure 11.5 for the direct materials purchases budget.
e See Figure 11.6 for the direct labor budget.
f See Figure 11.7 for the manufacturing overhead budget.
g See Figure 11.10 for the capital expenditures budget.
h See Figure 11.9 for the budgeted income statement.
i See Figure 11.11 for the cash budget.
j See Figure 11.12 for the budgeted balance sheet.
Key Takeaway
Some companies take a top-down approach to budgeting (upper management establishes the budget with little input from others), while other companies take a bottom-up approach (lower level employees are involved in the budgeting process). The bottom-up approach tends to be more effective as employees are more inclined to accept the budget. Regardless of the approach used, the budget committee (made up of a group within the organization) is responsible for overseeing and approving the master budget.
Review problem 11.2
- What is a master budget?
- Why do successful companies tend to use the bottom-up approach to establish a master budget?
Definitions
- A group within the organization responsible for overseeing and approving the master budget.
- A series of budget schedules outlining the organization’s plans for the upcoming period.
