Chapter 10 - Strategy and the Master Budget
Chapter 10
Strategy and the Master Budget
Learning Objectives (LOs)
8. Discuss various behavioral considerations in budgeting
New in this Edition
• One updated Real-World Focus (RWF) item (Contemporary Refinements to Traditional
Budgeting)
• Four totally new RWF items (Importance of Budgeting and Planning; Budgeting and Sensitivity
Analysis; Negative Behavioral Consequences of Traditional Budgeting; and, Rolling Financial
Forecasts)
• Three revised end-of-chapter problems
• Reduction in length of the chapter, with shorter, crisper explanations of the budgeting process
Teaching Suggestions
This chapter introduces one of the most strategic topics of the book—the master budget and the master
budgeting process. The master budget has a critical role in planning, coordinating, and controlling activities
Chapter 10 - Strategy and the Master Budget
Assignment Matrix
End-of-Chapter Exercises & Problems
Chapter Learning Objectives
Text Features
Lecture Notes
This chapter explains the role of strategic position in budgeting and the key roles budgets play in the
planning and control of operations. The chapter has four major themes: (1) the role of a firm's strategy in
guiding the budgeting process, (2) how to prepare the master budget for an organization, (3) ethical and
behavioral considerations in the budgeting process, and (4) current controversies regarding the role of the
traditional budgeting process.
A budget is an organization's quantified plan-of-action for an upcoming period; it identifies the resources
Chapter 10 - Strategy and the Master Budget
A typical budgeting process consists of the following components/tasks:
a. Forming the budget committee,
b. Determining the budget period,
c. Specifying budget guidelines,
d. Preparing the initial budget proposal,
e. Negotiating the final budget,
f. Reviewing and approving the budget, and
g. Revising budget.
Management at all levels of the organization should participate in budget preparation and understand and
support the budgets. Top management support is critical for the budgets. In any event, budgets should not
be administered rigidly because changing conditions may call for changes in plans.
The most frequently used budget period is one year that coincides with the organization's fiscal year. The
annual budget is often subdivided by quarters and by months. Some organizations use “continuous”
(rolling) budgets in which a month, quarter, or year is added as the month, quarter, or year is ended.
The master budget is a comprehensive expression of management's plan-of-action for a future time
period (usually a year); the master budget includes both operating and financial budgets. Preparation of a
master budget starts with a review and analysis of the organization's strategic goal(s) and long-term
objectives; the master budgeting process concludes with a set of budgeted financial statements including
Chapter 10 - Strategy and the Master Budget
cultural and language differences, dissimilar political and legal environments, fluctuating monetary
exchange rates, and discrepancies in the inflation rates of different countries.
Over the years alternative budgeting approaches have been proposed to improve budget effectiveness.
Among them are zero-base budgeting (ZBB), activity-based budgeting (ABB), time-driven activity-based
budgeting (TDABB), and Kaizen budgeting.
▪ A typical budgeting process starts with the current budget and assumes that most of the current
activities and functions will continue into the budget period. In contrast, a zero-base budgeting
(ZBB) approach allows no activity or function to be included in the budget period unless it can be
justified.
▪ Activity-based budgeting (ABB) and time-driven activity-based budgeting (TDABB) focus on the
budgeted costs of activities necessary to produce and sell products and services. ABB entails
formulating budgets for each activity area and links resource consumption and output. The more
detailed information available from ABB/TDABB provides managers with additional insight into
opportunities for cost reduction and elimination of non-value-added activities. Of particular
interest is a discussion regarding the use of ABB/TDABB for resource capacity planning (in
conjunction with the use of practical capacity to estimate cost-driver rates under ABC).
Chapter 10 - Strategy and the Master Budget