This document discusses key concepts related to budgeting for planning and control. It defines what a budget is and how budgets are used in both planning and control. Specifically, it explains that budgets are used to translate organizational goals into operational terms for planning, and are used as standards to provide feedback for control by comparing actual costs and revenues to planned amounts. The document also discusses the roles of master budgets, operating budgets, and financial budgets. It describes how sales forecasts and budgets are related and how all other budgets depend on the sales budget. Finally, it covers flexible budgets, static budgets, and activity-based budgets.

1. BUDGETING FOR PLANNING AND
CONTROL
Prepared By:
Sindy
1642140
Lecturer: Santi Yopie, SE., MM., CMA., Project+., CIBA., CPA., BKP.
2018

2. Define budget.
How are budgets used in planning?
Budget is:
 A financial plan for a business, prepared
in advance.
 An estimate of costs, revenues, and
resources over a specified period,
reflecting a reading of future financial
conditions and goals.
Budgets are used to translate the goals and
strategies of an organization into operational
terms.

3. Control Definition
Control is the process of setting standards,
receiving feedback on actual performance, and
taking corrective action whenever actual
performance deviates from planned
performance.
How are budgets used to control?
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.
Define control.
How are budgets used to control?

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.
 To control resources
 To communicate plans to various
responsibility center managers
 To motivate managers to strive to achieve
budget goals
 To evaluate the performance of managers
 To provide visibility into the company's
performance
 For accountability

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

6. 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 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.
The sales budget is the projection that describes expected sales for each
product in units and dollars.

7. 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.

8. 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.

9. 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?
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.

10. What impact does the learning curve have on
budgeting? What specific budgets might be affected?
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.

11. 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

12. Discuss the shortcomings of the traditional master budget. In
what situations would the master budget perform well?
 it does not recognize the interdependencies among
departments,
 it is static,
 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.

13. 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.

14. 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.
The first type of flexible budget is used for planning and sensitivity
analysis.
2. a budget for the actual level of activity.
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.

15. 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.

16. THANK YOU