This document discusses budgeting and provides answers to questions about budgets. It defines budgets as quantitative expressions of plans that are used for planning and control. Budgets are compared to actual costs and revenues to provide feedback in the control process. All departmental budgets depend on the sales budget. Flexible budgets allow comparison of actual costs to planned costs at the actual activity level. The steps in activity-based budgeting determine necessary activities and resources based on output, differing from the traditional master budget approach.

1. COST MANAGEMENT ACCOUNTING & CONTROL
CHAPTER 8
Budgeting For Planing and Control
Solution for Writing and Discussion
Nama : Meliana
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Ms. Santi Yopie, CMA., CPA.,BKP

2. QUESTION 1
Question : 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.

3. Question 2
Question : 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.

4. Question 3
Question : 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.

5. Question 4
Question : 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.

6. Question 5
 Question: 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.

7. Question 6
Question : 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

8. Question 7
Question : 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.

9. Question 8
Question : 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.

10. Question 9
Question : 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.

11. Question 10
Question : 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.

12. Question 11
Question : 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.

13. Question 12
Question : 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.

14. Question 13
Question : 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.

15. Question 14
Question : 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.

16. ThankYou 