Budgeting and forecasting are important planning and control tools for organizations. Budgets translate goals into quantitative spending plans, while forecasts predict future trends. All departmental budgets depend on the sales budget, as it determines the revenue available. While small firms may not create full master budgets, nearly all create cash budgets due to their importance for managing liquidity and avoiding cash flow issues. Flexible budgets allow adjustment for changing activity levels and provide more accurate performance analysis than static budgets.

1. Budgeting for Planning and
Control
Prepared by :
- Vika Novia ( 1642141 )
Universitas
Internasional Batam
Lecturer :
Santi Yopie, SE., MM., CMA., Project+., CIBA., CPA., BKP.
Email: santiyopie.uib@yahoo.com

2. Define budget. How are budgets
used in planning?
Budgeting is the process of creating a plan to spend your money. This
spending plan is called a budget. Creating this spending plan allows you
to determine in advance whether you will have enough money to do the
things you need to do or would like to do.
Budgets are the quantitative expressions of plans. Budgets are used to
translate 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.
 A budget serves as a control tool to provide standards for evaluating
performance.A budget can cover any of the following:
1. Profit planning – forecast of revenues and expenses
2.Cash budgeting – forecast of cash needs and sources
3.Balance sheet forecasting – anticipating future assets, liability and
net worth position of the business

4. 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.
 A budget helps your entire family focus on common goals.
 A budget helps you prepare for emergencies or large or unanticipated expenses
that might otherwise knock you for a loop financially.
 A budget reveals areas where you're spending too much money so you can
refocus on your most important goals.
 A budget can keep you out of debt or help you get out of debt.
 operating without a budget? No, and neither should you.
 A budget lets you control your money instead of your money controlling you.

5. What is the master budget? An operating
budget? A financial budget?
 The master budget is a one-year budget planning document for the firm
encompassing all other budgets. It coincides with the fiscal year of the firm
and may be broken down into quarters and further into months.
 The operating budget shows the income-generating activities of the firm,
including revenues and expenses. The result is a budgeted income statement
operating budget is actually composed of eight supporting budget planning
schedules.
 The financial budgetshows the inflows and outflows of cash and other
elements of the firm's financial position. The inflows and outflows of cash
come from the cash budget .

6. Explain the role of a sales forecast in budgeting. What is
the difference
between a sales forecast and a sales budget?
 A financial plan expressed regarding money, prepared by the management in advance for the
forthcoming period, is called a budget. The forecast is an estimation of future business trends and
outcomes based on historical data.
 Budget is a financial expression of a business plan, whereas forecast is a prediction of upcoming
events or trends in business, on the basis of present business conditions.
 Budgets are prepared annually for every accounting period. On the other hand, the forecast is
revised and frequently adjusted, i.e. at short intervals.
 In budgeting, variance analysis is done to compare actual results with the expected results.
Conversely, in forecasting, variance analysis is not done.
 Budgets estimate what business plans to achieve. As opposed to the forecast, which estimates what
business will achieve.
 Budgets usually set targets for the future. Unlike forecast, which only projects future outcomes but
does not set any target.

7. BASIS FOR COMPARISON BUDGET FORECAST
Meaning A budget is a financial plan
expressed in quantitative terms,
prepared by the management in
advance for forthcoming period.
Forecast means estimation of
future trends and outcomes, based
on the past and present data.
What is it? It is the financial expression of a
business plan or target.
It is the prediction of upcoming
events or trends in business, on the
basis of present business
conditions.
Target Budget sets target. There are no targets.
Updation Annual basis At regular intervals
Estimates What business wants to achieve What business will achieve
Variance Analysis Yes No

8. 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. all budgets depend on sales
budgets because budgets can't exceed the amount of available
money. When sales are poor, the budgets will be smaller.

9. 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.

10. 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
(etc : 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.

11. 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.

12. 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.

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

14. 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.

15. 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
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.

16. 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.

17. Thanks 