Cost Management Accounting & Control

Cost Management
Accounting & Control
Chapter 8
Budgeting For Planning & Control
Solution For Writing & Discussion
Nama: Noviana
NPM: 1642048
Universitas International Batam
Ms. Santi Yopie, CMA., CPA., BKP

Question No.1
 Q : Define budget. How are budgets used in planning?
 A : Budgets are the quantitative expressions of plans. Budgets are used to translate the
goals and strategies of an organization into operational terms.

Question No.2
 Q : Define control. How are budgets used to control?
 A : 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.

Question No.3
 Q : Discuss some of the reasons for budgeting.
 A : 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.

Question No.4
 Q : What is the master budget? An operating budget? A financial budget?
 A : 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.

Question No.5
 Q : Explain the role of a sales forecast in budgeting. What is the difference
between a sales forecast and a sales budget?
 A : 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.

Question No.6
 Q : All budgets depend on the sales budget. Is this true? Explain.
 A : 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

Question No.7
 Q : 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?
 A : 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.

Question No.8
 Q : 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?
 A : 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.

Question No.9
 Q : 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.)
 A : 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.

Question No.10
 Q : 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?
 A : 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.

Question No.11
 Q : Discuss the shortcomings of the traditional master budget. In what situations
would the master budget perform well?
 A : 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.

Question No.12
 Q : Define static budget. Give an example that shows how reliance on a static budget
could mislead management.
 A : 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.

Question No.13
 Q : What are the two meanings of a flexible budget? How is the first type of flexible
budget used? The second type?
 A : 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.

Question No.14
 Q : What are the steps involved in building an activity-based budget? How do these
steps differentiate the ABB from the master budget?
 A : 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.

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