This document summarizes key points from a lecture on budgeting for planning and control. It addresses common questions about budgets, including definitions of different types of budgets like master budgets, operating budgets, and financial budgets. It discusses how budgets are used for planning by translating goals into quantitative plans, and for control by setting standards and providing feedback. Specific topics covered include the roles of sales forecasts and budgets, how budgets in different areas depend on the sales budget, and factors to consider when individual managers in charge of areas like sales or production are perceived to have optimistic or pessimistic tendencies. The document also contrasts traditional static master budgets with more flexible and activity-based budgets.

1. BUDGETING FOR PLANNING AND CONTROL
HENDRY
1642152
LECTURE : SANTI YOPIE, SE., MM., CMA., CPA., CIBA.,
PROJECT+., BKP.
UNIVERSITAS INTERNATIONAL BATAM

2. QUESTION AND ANSWER
1. 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.
2. 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.
3. 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.

3. 4. What is the master budget? An operating budget? A financial budget?
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.
5. 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.
6. 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.

4. 7. 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.
8. 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.

5. 9. 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.
10. 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.

6. 11. 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.
12. 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.

7. 13. 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.
14. 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

8. THANK YOU