Question and discussion about Budgeting

1. BUDGETING FOR
PLANNING AND CONTROL
Prepared By:
Peny (1642138)
Lecturer:
Santi Yopie, SE., MM., CMA., Project+., CIBA., CPA., BKP.
Email: santiyopie.uib@yahoo.com

2. DEFINE BUDGET. HOW ARE
BUDGETS USED IN PLANNING?
• Budgets are the quantitative
expressions of plans. Budgets are
used to translate the goals and
strategies of an organization into
operational terms.

3. DEFINE CONTROL. HOW ARE
BUDGETS USED TO CONTROL?
• 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.
• Budgeting, as a control tool, provides an action plan to ensure that the organization's
actual activities are least deviated from the planned activities. Budgets are used to give
an overview of the organization and its operations. They are useful in resource allocation
where resources are allocated in such a way that the processes which are expected to
give the highest returns are given priority. Budgets are also forecast tools and make the
organization better prepared to adapt to changes in the environment.

4. DISCUSS SOME OF THE REASONS FOR
BUDGETING.
• 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.
• Budget to make sure you are able to live on what you earn.
• Budgeting will help you reduce debt.
• A budget can be a dynamic document you update weekly or monthly,
allowing you to see how you will end the year if your income and
spending continue at your current levels.

5. COMPONENTS OF THE
MASTER BUDGET

6. WHAT IS THE MASTER BUDGET? AN
OPERATING BUDGET? A FINANCIAL BUDGET?
• The master budget is a comprehensive financial plan for the year and is made up
of various individual departmental and activity budgets. A master budget can be
divided into operating and financial budgets.
• Operating budgets are concerned with the income generating activities of a firm:
sales, production, and finished goods inventories. The ultimate outcome of the
operating budgets is a pro forma or budgeted income statement. Note that “pro
forma” is synonymous with “budgeted” and “estimated.” In effect, the pro forma
income statement is done “according to form” but with estimated, not histori-cal,
data.
• Financial budgets are concerned with the inflows and outflows of cash and with
financial position. Planned cash inflows and outflows are detailed in a cash budget,
and expected financial position at the end of the budget period is shown in a
budgeted, or pro forma, balance sheet

7. EXPLAIN THE ROLE OF A SALES FORECAST IN
BUDGETING. WHAT IS THE DIFFERENCE
BETWEEN A SALES FORECAST AND A SALES BUDGET?
• The sales forecast is the basis for the sales budget, which, in turn, is the
basis for all of the. 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
• The sales budget is the projection that describes expected sales for each
product in units and dollars.

8. ALL BUDGETS DEPEND ON THE SALES BUDGET. IS THIS
TRUE? EXPLAIN!
• 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.
• Creating a sales budget is an area of business that many companies rely on
for many other components of their operation. The sales budget is a
document that attempt to forecast how much will be sold over a specific
period of time. This is a very important document for a number of reasons.

9. 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?
• 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.

10. • 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.
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?

11. 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.)
• 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.

12. 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?
• 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.

13. DISCUSS THE SHORTCOMINGS OF THE TRADITIONAL
MASTER BUDGET. IN WHAT SITUATIONS
WOULD THE MASTER BUDGET PERFORM WELL?
• 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.

14. DEFINE STATIC BUDGET. GIVE AN EXAMPLE THAT
SHOWS HOW RELIANCE ON A STATIC
BUDGET COULD MISLEAD MANAGEMENT
• 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.

15. WHAT ARE THE TWO MEANINGS OF A FLEXIBLE
BUDGET? HOW IS THE FIRST TYPE OF
FLEXIBLE BUDGET USED? THE SECOND TYPE
• 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.

16. WHAT ARE THE STEPS INVOLVED IN BUILDING AN ACTIVITY-
BASED BUDGET? HOW DO
THESE STEPS DIFFERENTIATE THE ABB FROM THE MASTER
BUDGET?
• 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.