The document discusses various budgeting concepts and terms: - Budgets are quantitative expressions of plans that translate organizational goals into operational terms. They are used for both planning and control by comparing actual outcomes to planned outcomes. - Master budgets are comprehensive financial plans that include operating budgets for income-generating activities and financial budgets for cash flows and financial position. - Flexible budgets allow costs to vary with changes in activity levels, while static budgets do not change with varying activity. Activity-based budgets determine resource needs by first linking them to activities and outputs.

1. BUDGETING FOR PLANNING & CONTROL
COST MANAGEMENT
Accounting & Control
Prepared by : Yeni Wati 1642120
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 these plans,
stated in either physical or financial terms or both.
When used for planning, a budget is a method for
translating 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
significantly from planned performance. Thus, budgets
can be used
to compare actual outcomes with planned outcomes,
and
they can steer operations back on course, if necessary.

4. Discuss some of the reasons for budgeting.
• Budgeting forces managers to plan, provides resource information for
decision making, set benchmarks for control and evaluation, and improves
the functions of communication and coordination.
• A budget help you gain control of your finances.
• A budget reveals areas where you’re spending too much money so you can
refocus on you most important goals.
• A good budget keeps you honest.
• Budgeting helps improve habits.
• Budgeting help you avoid debt and improve credit.

5. 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 historical, 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.

6. Explain the role of a sales forecast in
budgeting. What is the difference between a
sales forecast and a sales budget?
• The forecast is typically limited to major revenue and expense line items.
There is usually no forecast for financial position, though cash flows may be
forecasted.
• The forecast is updated at regular intervals, perhaps monthly or quarterly.
• The forecast may be used for short-term operational considerations, such as
adjustments to staffing, inventory levels, and the production plan.
• There is no variance analysis that compares the forecast to actual results.
• Changes in the forecast do not impact performance-based compensation
paid to employees.
Thus, the key difference between a budget and a forecast is that the budget is a
plan for where a business wants to go, while a forecast is the indication of where
it is actually going.

7. All budgets depend on the sales budget. Is this true?
Explain.
Yes, all budgets depend on sales budgets because one of the
reasons that sales budgets are so important is because all of the
other business budgets are based on this one document.
Without the sales budget, you cannot forecast anything else that
will go on your business. You do not know how much you should
spend on advertising, how much you should spend on
production or any other component of your business. While you
know your fixed expenses like rent and utilities, the rest of the
expenses will largely depend on how much you sell.

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?
Being an optimistic individual have pros and cons. For
example, he/she will give us a solution or advice to
help people settle business problems, which is the pro
side. While on the con side, this individual will
underestimate some problems and didn’t handle them
really well or the result are not what the expected to be.

10. 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.

11. While many small firms do not put together a complete
master budget, nearly every firm creates a cash budget. What
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?
Whether big companies or small companies, they create cash
budget, because we will know whether we have any account
receivables or accounts payable.

13. Define static budget. Give an example that shows how
reliance on a static budget could mislead management.
A static budget is fixed for the entire period covered by the budget, with no
changes based on actual activity. Thus, even if actual sales volume
changes significantly from the expectations documented in the static
budget, the amounts listed in the budget are not changed.
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

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 :
• a budget for various levels of activity
• 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. 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.
The difference between ABB and the master budget is that master budget
directly leaps from output to resources while ABB don’t.

16. THANK YOU