Budgeting For Planning and Control

1. BUDGETING FOR PLANNING AND
CONTROL
ASSIGNMENT CHAPTER 8
By :
Gregorius (1642005)
4AKAMA
Lecturer :
SantiYopie, SE., MM., CMA., Project+., CIBA., CPA., BKP.

2. Question 1 :
Define budget. How are budgets used in
planning ?

3. Answer 1 :
Budgeting is a planning and control system. It communicates to all members of the
organization what is expected of them. Planning is determining the activities to be
accomplished to achieve objectives and goals. Planning is needed so that a company can
operate its departments and segments successfully within. It looks at what should be done,
how it should be done, when it should be done, and by whom.
Planning involves the determination of objectives, evaluating alternative courses of
action, and authorization to select programs. There should be a good interface of segments
within the organization.
Budgets are blueprints for projected action and a formalization of the planning
process. Plans are expressed in quantitative and monetary terms. Planning leads us to an
action based upon investigation, analysis, and research. Potential problems are searched out.
Budgeting induces planning in each phase of the company’s operation. A profit plan is what a
company expects to follow to attain a profit goal. Managers should be discouraged from
spending their entire budget. Managers should be given some type of reward for their cost
savings.
Budget planning meetings should be held routinely to discuss such topics as the
number of staff needed, objectives, resources, and time schedules. There should be clear
communication of how the numbers are established and why, what assumptions were made,
and what the objectives are.

4. Question 2 :
Define control. How are budgets used to control ?

5. Answer 2 :
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 standards, and
they are compared with actual costs and
revenues to provide feedback.

6. Question 3 :
Discuss some of reasons for budgeting ?

7. Answer 3 :
1. A budget helps you gain control of your
finances.
2. Budgeting helps you achieve goals.
3. A good budgets keeps you honest.
4. Budgeting helps improve habits.
5. Budgeting can help avoid debt and improve
credit.

8. Question 4 :
What is the master budget ? An operating
budgets? A financial budgets?

9. Answer 4 :
The master budget is a comprehensive financial plan made up of
various individual departmental and activity budgets for the year. A
master budget can be divided into:
Operating budgets, which outline the income-generating activities of a
firm (sales, production, and finished goods inventories).
 The outcome of the operating budgets is a pro forma (budgeted) income
statement.
Financial budgets, which outline the inflows and outflows of cash and
the financial position.
 The outcome of the financial budgets includes a cash budget and a pro forma
(budgeted) balance sheet.
 The master budget is usually prepared for a one-year period corresponding to the
company’s fiscal year.
 The yearly master budget can be broken down into quarterly and monthly
budgets to allow managers to compare actual data with budgeted data as the
year unfolds and to make timely corrections.

10. Question 5 :
Explain the role of a sales forecast in
budgeting. What is difference between a
sales forecast and a sales budget ?

11. Answer 5 :
The sales forecast is a critical input for
building the sales budget. However, it is not
necessarily equivalent to sales forecast,
management may decide that the firm can
do better than then forecast indicates.
Consequently. Actions may be taken to
increase the sales potential for the coming
year. This adjusted forecast then becomes the
sales budgets.

12. Question 6 :
All budgets depend on the sales budget. Is it
true? Explain.

13. Answer 6 :
Yes, It is true.
The sales budget is the projection approved
by the budget committee that describes
expected sales for each product in units and
dollars. The sales budget must be constructed
first, before other budgets can be
constructed.

14. Question 7 :
Suppose that the vice president of sales is a
particularly pessimistic individual. If you were
charge of developing the master budget,
how, if at all, would you be influenced by this
knowledge ?

15. Answer 7 :
If the vice president of sales is a pessimistic
individual, one might expect that he/she
would underestimate sales. In my role as
head of budget process, I might increase the
budgeted sales figure to take out the
individual bias.

16. Question 8 :
Suppose that the controller of your
company’s largest factory is particularly
optimistic individual. If you were in charge of
developing the master budget, how, if at all,
would you be affect this knowledge ?

17. Answer 8 :
If the factory controller is a particularly
optimistic individual, it is possible that all the
cost could be underestimated. (the cost such
as cost of direct material, cost of direct labor,
and cost of overhead)

18. Question 9 :
What impact does learning curve have on
budgeting? What specific budgets might be
affected ? (Hint : Refer to Chapter 3 for
material on the learning curve.)

19. Answer 9 :
The learning curve is the relationship
between unit cost of production and
increasing number of units. As the time go
on, the number of units produced in the 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.

20. Question 10 :
While many small firms do not put together a
complete master budget, nearly every firm
creates a cash budget. Why do you thinks
that is so ?

21. Answer 10 :
The preparation of cash budget is an important
management task. While some small businesses
may be able to survive for a time without budgeting,
savvy business owners will realize its importance. A
cash budget can protect a company from being
unprepared for seasonal fluctuations in cash flow or
prepare a company to take advantage of unexpected
quantity discounts from suppliers.
Many small businesses find it helpful to prepare
monthly cash budgets and to analyze any variances
between the budgeted and actual amount on a
monthly basis. This enables small business owners
and managers to stay on top of any unexpected cash
uses.

22. Question 11 :
Discuss the shortcoming of traditional master
budget. In what situations would the master
budget perform well ?

23. Answer 11 :
Criticisms of the master budget can be
classified into several categories.
The traditional master budget is :
1. Department oriented and does not recognize the
interdependencies among department.
2. Static, not dynamic.
3. Results, not process, oriented.

24. Question 12 :
Define static budget. Give an example that
shows how reliance on a static budget could
mislead management.

25. Answer 12 :
The static (fixed) budget is budgeted figures at the expected
capacity level. Allowances are set forth for specific purposes with
monetary limitations. It is used when a company is relatively
stable. Stability usually refers to sales. The problem with a static
budget is the absence of flexibility to adjust to unpredictable
changes. In industry, fixed budgets are appropriate for those
departments whose workload does not have a direct current
relationship to sales, production, or some other volume
determinant related to the department’s operations. The work of
the departments is determined by management decision rather
than by sales volume. Most administrative, general marketing,
and even manufacturing management departments are in this
category. Fixed appropriations for specific projects or programs
not necessarily completed in the fiscal period also become fixed
budgets to the extent that they will be expended during the year.
Examples are appropriations for capital expenditures, major
repair projects, and specific advertising or promotional programs

26. Question 13 :
What are the two meaning of a flexible
budget? How is the first type of flexible
budget used?The second type ?

27. Answer 13 :
1. A flexible budget shows costs for varying
levels of activity.
 Useful for planning
 Useful for sensitivity analysis.
2. A flexible budget can be constructed for the
actual level of activity.
• Useful for control
• Compares actual costs to budgeted amounts for
actual level of activity.

28. Question 14 :
What are the steps involved in building an
activity-based budget ? How do these steps
different the ABB from master budget?

29. Answer 14 :
The activity-based budget begins with output and then determines the
resources necessary to create that output. Ideally, the organization
translates its vision into a strategy with definable objectives in order to
create value. Ways of creating value include growing market share,
improving sales rates, reducing expenses, increasing profit margin,
increasing productivity, and reducing the cost of capital. We can see how
clearly ABB is related to performance evaluation and, in particular, to
economic value added.
We can look at a department’s budget from three perspectives: a
traditional approach, a flexible budgeting relies on the use of line items,
such as salaries, supplies, depreciation on equipment, and so on. The
flexible budget uses knowledge of cost behavior to split the line items
into fixed and variable components. The activity-based budget works
backward from activities and their drivers to the underlying costs.