The document outlines the fundamental concepts of budgeting, including definitions, uses in planning and control, and different types of budgets such as master, operating, and financial budgets. It emphasizes the importance of sales forecasts in budgeting, the impact of individual perspectives on budget development, and the benefits of flexible budgets in varying activity levels. Key shortcomings of traditional master budgets are discussed, including their static nature and lack of interdepartmental recognition, with recommendations for activity-based budgeting to better allocate resources.

1. Lecturer: Santi Yopie, SE., MM., CMA., Project+., CIBA., CPA., BKP
Budgeting for
Planning and Control
Prepared by : Elva Derista 1642117

2. Define budget. How are budgets used
in planning?
01

3. 01
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.

4. 02
Define control. How are budgets used
to control?

5. 02
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.

6. 03
Discuss some of the reasons for
budgeting.

7. 03 Control
Businesses also use budgets to
control expenditures for specific
periods by comparing what was
spent during that period to the
master budget. Continual
monitoring of expenses and
revenues should prevent
businesses from exceeding their
budgets. Ideally, budgets should
contain some flexibility.
Expenditures and revenues often
will stray from their forecasts. You
may receive an unexpected
discount from a vendor, or your
sales may exceed your best guess
estimates for any given period. Or,
you may incur unexpected charges
during a time when sales drop
without warning. Successful
businesses are able to adapt and
compensate for those changes.
Evaluation of
Performance
Budgets are a valuable tool for
evaluating the performance of your
company and the efficacy of your
budget. Owners can use it to review
actual expenses, for example, as
compared to the estimated
expenditures. If there's a large
divergence between the two, the
owner and the financial planner can
review the budget for flaws.
Preparing a budget can be a lot to get
your head around. All those numbers
spread among so many tasks over so
many months can leave you dazed.
But, it's an essential part of
maintaining your business, as
important as any marketing plan or
advertising campaign. After all, you
can plan for either of those unless you
know how much money you can
spend.
Planning
Think of your budget as a planning
tool. Use it to attain your goals by
determining how much money you
can spend on different elements of
your operation. Your periodic budgets
should be archived so you can revisit
previous periods (for example, month-
over-month or quarter-over-quarter)
and evaluate whether your company's
results are improving. A master
budget provides an overview of
financial activities involving assets,
liabilities, equity, revenue, expenses,
and costs over a specific period.
Owners first develop a master or
static budget with numbers based on
planned inputs (sales revenue) and
outputs (expenses). Think of this data
in very simple terms. You'll use it to
estimate what the firm will take in
from sales revenue and what the firm
will pay out in expenses.

8. 04
What is the master budget? An operating
budget? A financial budget?

9. MASTER
BUDGET
a comprehensive financial
plan for the year and is made
up of various individual
departmental and activity
budgets.
OPERATING
BUDGET
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.
.
FINANCIAL
BUDGET
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 proforma, balance sheet.
04

10. 05
Explain the role of a sales forecast in
budgeting. What is the difference
between a sales forecast and a sales
budget?

11. 05
The sales forecast is the basis for the sales budget, which, in turn, is the basis for all of the
other operating budgets and most of the financial budgets. Accordingly, the accuracy of the
sales forecast strongly affects the soundness of the entire master budget.
Sales Budget: How much we'd like to pull in during a given period of time, usually prepared
on a yearly basis.
Sales Forecast: How much we think we'll actually pull in during a given period of time,
usually prepared on a monthly or quarterly basis.
Difference: Sales Budget is the number you really hope to get from sales. This is where you
*want* to go - your ultimate sales goal. Sales Forecast is how you're actually tracking on
that number - will you make your budget goal? Exceeded it? Sales Forecast tells you if you're
trending toward or away from your goal.

12. 06
All budgets depend on the sales budget.
Is this true? Explain.

13. 06
Yes, It is true. You can find the answer from the below :
1. Key to Budgeting
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.
2. Sales Goals
Another reason that a sales budget is so important is because it helps set a specific goal for the sales staff to
reach. The budget can be a rallying point for groups of sales people when they are trying to reach a certain
threshold. Many businesses give their sales staff a specific bonus if they hit their sales budget. This can help
motivate the sales staff to work harder and sell more. Sales managers can rely on these numbers to know exactly
what they are expected to do each month.
3. Advertising
Most businesses spend a large amount of money on advertising on a regular basis. If the business has been
doing this for some time, it most likely has an idea of how many sales are generated from the advertising. If the
company has a projection on how much it will sell during a given period of time, it also knows approximately
how much to spend on advertising to generate these sales. This will help the company avoid spending more
money than is necessary when it comes to advertising campaigns.
4. Other Strategies
The process of developing a sales budget helps a company know how much it can expect to sell during a given
period of time. If the company determined that this is not enough money to meet its current obligations, it can
begin the planning process of looking at other income-generating activities. For example, the company might
wish to expand into other products or markets to increase revenue if needed. Without planning ahead, the
company could be caught off guard.

14. 07
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?

15. 07
if the vice president is a pessimistic individual, he/she will not have a
high expectation from his/her results. Therefore, I would count or
show him/her the amount of sales budget and make him/her a better
individual.

16. 08
Suppose that the controller of your company
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?

17. 08
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 (that there will be
no problems in obtaining an supply of materials at the lowest price). As head of the
budget process, you might allow for somewhat higher costs to more accurately reflect
reality.

18. 09
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.)

19. 09
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.

20. 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?

21. 10
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 cashflow could put a company out of business in short order.

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

23. 11
It does not recognize the interdependencies among departments01
02
It is results rather than process oriented03
It is static
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.

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

25. 12
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 340 per unit
($1.890.000/90.000). Not adjusting the budget for changes in activity level can mislead
managers about efficiency.

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

27. 13
A flexible budget is
1. A budget for various levels of activity which is used for planning and
sensitivity analysis.
2. a budget for the actuallevel of activity which 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.

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

29. 14
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.

30. THANK YOU