1. J E A N Y C H R I S T I A N A - 1 6 4 2 0 4 0
BUDGETING FOR
PLANNING AND CONTROLING
Santi Yopie, SE., MM., CMA., Project+., CIBA., CPA., BKP.
2. 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. BASIC 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. 6. 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. 7. 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. 8.SUPPOSE THAT THE CONTROLLER OF YOUR
COMPANY’S LARGEST FACTORY IS A
PARTICULARLY
Optimistic individual. If you were in charge of developing the
masterbudget, 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. 9. 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. 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?
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. 11.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. 12.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. 13. 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 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. 14. WHAT ARE THE STEPS INVOLVED IN BUILDING AN
ACTIVITYBASED 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.
