Cost management chapter 8 budgeting for planning & control solution for writing & discussion

ACCOUNTING & CONTROL
CHAPTER 8
BUDGETING FOR PLANNING &
CONTROL
SOLUTION FOR WRITING &
DISCUSSION
Name : Dewi Novita
NPM : 1642007
Universitas International Batam
Ms. Santi Yopie, CMA., CPA., BKP

QUESTION - 1
Define budget. How are budgets used in planning?
Answer :
Budgets are the quantitative expressions of plans. Budgets
are used to translate the goals and strategies of an
organization into operational terms.

QUESTION – 1I
Define control. How are budgets used to control?
Answer :
Control is the process of setting standards, receiving feedback on
actual performance, and taking corrective action whenever actual
performance deviates from planned performance. Budgets are the
standards, and they are compared with actual costs and revenues to
provide feedback.

QUESTION – III
Discuss some of the reasons for budgeting.
Answer :
Budgeting forces managers to plan, provides resource
information for decision making, sets benchmarks for control
and evaluation, and improves the functions of communication
and coordination.

QUESTION – IV
What is the master budget? An operating budget? A financial
budget?
Answer :
The master budget is the collection of all individual area and activity
budgets. Operating budgets are concerned with the income-
generating activities of a firm. Financial budgets are concerned with
the inflows and outflows of cash and with planned capital
expenditures.

QUESTION – V
Explain the role of a sales forecast in budgeting. What is the difference
between a sales forecast and a sales budget?
Answer :
The sales forecast is a critical input for building the sales budget. It, however,
is not necessarily equivalent to the sales budget. Upon receiving the sales
forecast, management may decide that the firm can do better or needs to do
better than the forecast is indicating. Consequently, actions may be taken to
increase the sales potential for the coming year (e.g., increasing advertising).
This adjustment then becomes the sales budget.

QUESTION – VI
All budgets depend on the sales budget. Is this true? Explain.
Answer :
Yes. All budgets essentially are founded on the sales budget. The
production budget depends on the level of planned sales. The
manufacturing budgets, in turn, depend on the production budget.
The same is true for the financial budgets since sales is a critical
input for budgets in that category

QUESTION – VII
Suppose that the vice president of sales is a particularly pessimistic
individual. If you were in charge of developing the master budget, how, if
at all, would you be influenced by this knowledge?
Answer :
If the vice president of sales is a pessimistic individual, one might expect
that she or he would underestimate sales for the coming year. In your role
as head of the budget process, you might increase the budgeted sales
figure to take out the individual bias.

QUESTION – VIII
Suppose that the controller of your company’s largest factory is a particularly
optimistic individual. If you were in charge of developing the master budget, how, if
at all, would you be influenced by this knowledge?
Answer :
If the factory controller is a particularly optimistic individual, it is possible that the
costs for direct materials, direct labor, and overhead could be underestimated. For
example, an optimistic person might assume that everything will go well (e.g.,that
there will be no problems in obtaining an adequate supply of materials at the
lowest possible price). As head of the budget process, you might allow for
somewhat higher costs to more accurately reflect reality.

QUESTION – IX
What impact does the learning curve have on budgeting? What specific
budgets might be affected? (Hint:Refer to Chapter 3 for material on the
learning curve.)
Answer :
The learning curve is the relationship between unit costs of production and
increasing number of units. As time goes on, the number of units produced in
a time period will increase and the cost per unit will decrease. The budgets
affected will be the direct materials purchases budget, the direct labor
budget, and the overhead budget. Universitas International Batam

QUESTION – X
While many small firms do not put together a complete master budget, nearly
every firm creates a cash budget. Why do you think that is so?
Answer :
Small firms often do not engage in a comprehensive master budgeting process.
(Personally, we believe that is a mistake. The budgeting process helps
management more fully understand the business and helps them to plan for the
coming year.) Even small businesses create cash budgets, however, because
cash flow is critically important. For example, it is possible to have positive
operating income, but negative cash flow (e.g., if sales on account are high, but
customers are slow to pay). Negative cash flow could put a company out of
business in short order. Universitas International Batam

QUESTION – XI
Discuss the shortcomings of the traditional master budget. In what situations
would the master budget perform well?
Answer :
The master budget has been criticized for the following reasons: it does not
recognize the interdependencies among departments, it is static, and it is
results rather than process oriented. These criticisms are especially apparent
when companies are in a competitive, dynamic environment. When the
environment changes slowly, if at all, the master budget would do a good job
of both planning and control.

QUESTION – XII
Define static budget. Give an example that shows how reliance on a static budget could
mislead management.
Answer :
A static budget is one that is not adjusted for changes in activity. Using a static budget for
control can be a real problem. For example, suppose that the master (static) budget is
based on the production and sale of 100,000 units, but that only 90,000 units are actually
produced and sold. Further suppose that the budgeted variable cost of goods sold was
$2,000,000, and that the actual variable cost of goods sold was $1,890,000. It looks as if the
company spent less than expected for variable manufacturing costs. However, the budgeted
variable cost was $20 per unit ($2,000,000/100,000), and the actual variable cost per unit is
$21 per unit ($1,890,000/90,000). Not adjusting the budget for changes in activity level can
mislead managers about efficiency. Universitas International Batam

QUESTION – XIII
What are the two meanings of a flexible budget? How is the first type of
flexible budget used? The second type?
Answer :
A flexible budget is (1) a budget for various levels of activity or (2) a
budget for the actual level of activity. The first type of flexible budget is
used for planning and sensitivity analysis. The second type of budget is
used for control, since the actual costs of the actual level of activity can
be compared with the planned costs for the actual level of activity.

QUESTION –
XIV
What are the steps involved in building an activity-based budget? How do these steps
differentiate the ABB from the master budget?
Answer:
The activity-based budget starts with output, determines the activities necessary to create
that output, and then determines the resources necessary to support the activities. This
differs from the traditional master budgeting process in that the master budget leaps directly
from output to resources. Some of the resource levels are assumed to be fixed. This makes
them independent of volume changes and hides the drivers that actually do affect the fixed
resources. As a result, the budget format does not support the creation of value and the
thinking that would go into determining the sources of waste.

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