Accounting Business Reporting for Decision Making

388 Accounting: Business Reporting for Decision Making

• Program budget, which focuses on costs associated with a specific program. This is a budget form

commonly used in the government and not-for-profit sector.

The budget structure that an entity will use depends on a range of factors. Table 9.1 provides a sample

list of possible budgets for different entity settings. These budgets are commonly arranged under the

umbrella of a master budget.

TA BLE  9.1 Applicable budgets for sample entities

Manufacturer

Service

(e.g. a hotel)

Professional services

(e.g. an accounting

or law entity)

Government

department

Sales budget Sales budget Fees budget Labour-related budget

Production budget Labour budget Labour budget Expenses budget

Direct materials budget Expenses budget Expenses budget Departmental/functional

budgets

Direct labour budget Departmental budgets Departmental budgets Cash budget

Manufacturing overhead

budget

Cash budget Cash budget Program budget

Non-manufacturing

expenses budget

Budgeted statement of

profit or loss

Budgeted statement of profit

or loss

Departmental budgets Budgeted balance sheet Budgeted balance sheet

Cash budget

Budgeted statement of

profit or loss

Budgeted balance sheet

9.4 Master budget

LEARNING OBJECTIVE 9.4 Outline the components of a master budget and prepare a master budget.

A master budget is a set of interrelated budgets for a future period. It provides a framework for viewing

the relevant budgets of an entity. While the nature of the budgets prepared will vary according to the

nature of the entity and its operating environment, the master budget is commonly classified into oper-

ating budgets and financial budgets. The operating budgets usually include the sales budget and oper-

ating expenses budget, while the financial budgets commonly include the broader budgeted statement of

profit or loss, the budgeted balance sheet, the cash budget and the capital budget. The plans developed

for the master budget are summarised in a set of budgeted financial statements.

To enable the budget to be used as a control tool to monitor the entity’s achievement of its plans,

the classification of items included in the master budget needs to mirror the entity’s chart of accounts.

The chart of accounts is the detailed listing/index that guides how transactions will be classified and

recorded in the financial reporting system. It is important that the budget is developed in line with this

classification structure, otherwise those within the entity will be unable to identify any budget variances

by comparing actuals against budget.

Because budgets are based on forecasts about the future, complete accuracy is impossible and vari-

ances will inevitably arise. A variance is the difference between actual and budget results, and it can

be either favourable or unfavourable. A favourable variance occurs when actual revenues are larger than

budgeted, or actual costs are lower than budgeted. Conversely, an unfavourable variance arises when

actual revenues are lower than budgeted, or actual costs are greater than budgeted. Determining the

underlying reasons for a budget variance is not a straightforward exercise. For example, a favourable

cost variance could be obtained by an efficient use of resources, or by the use of lower quality, low-cost

resources. Each entity determines the level of variance that will be tolerated before investigations are