(a) What is a master budget? What are some of the underlying budgets that form the master budget? What is the budgeting process at your organization? Is it effective? Why or why not?
(b)What is the difference between external and internal pricing? What factors must be considered when setting internal transfer pricing between divisions of a company? What are the different methods of setting internal transfer pricing? Which is the most effective? Why?
(c) What is responsibility accounting? For what costs should managers of responsibility centers be held accountable? What are some of the behavioral issues that surround responsibility accounting? How should these issues be addressed?
(a) The master budget is based on management's expertise and historical trend (data from previous years). The master budget forms the basis for management allocating the appropriate amount of money to each needed area (for expenses, purchases, etc.). The master budget also includes the projected amount of revenues, and comes down to the expected profit or loss for the company in the given year that is covered by the budget. The underlying budgets that form the master budget include the capital budget, which is comprised of the major asset purchases that the company plans to make, including new machinery, new vehicles, property, etc. The flexible budget is also used, which is a budget that encompasses the regular expenses of the business, and includes both fixed and variable expenses. The appropriation budget is also used, which includes amounts that are discretionary and subject to change, like amounts allocated for training, education, and advertising costs. We only use a master budget and it is relatively effective because in our organization, our costs only have a minimal amount of change from year-to-year. We are not ...
The solution provides a detailed discussion for each question presented involving master budgets, internal and external pricing, and responsibility accounting.