Budgeting for planning and control

Budgeting for Planning and control chapter 8 question for writing and discussion

1. Budgeting for Planning and Control Created By : Novia Junita (1642137) Lecturer : Santi Yopie , SE., MM., CMA., Project+., CIBA., CPA., BKP. 2017/2018 Universitas International Batam

2. 1. Define budget. How are budgets used in planning? » Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. » A budget is a plan to: - control your finances - ensure you can continue to fund your current commitments - enable you to make confident financial decisions and meet your objectives - ensure you have enough money for your future projects

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 whenever actual performance deviates from planned performance. » Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

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.

5. 4. What is the master budget? An operating budget? A financial budget? » 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.

6. 5. Explain the role of a sales forecast in budgeting. What is the difference sales forecast and sales budget » Role : Budgets are the quantitative expressions of plans that identify an organization’s objectives and the actions needed to achieve them. They form the basis for operations. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action. Budgets can be used to compare actual outcomes with planned outcomes.

7. 5. Explain the role of a sales forecast in budgeting. What is the difference sales forecast and sales budget

8.   6 . All budget depend on the sales budget. Is it true? Explain » Yes . The budgeting process is the sales budget because the usefulness of the entire operating budget depends on it. 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. The sales budget involves estimating or forecasting how much demand exists for a company’s goods and then determining if a realistic, attainable profit can be achieved based on this demand. Sales forecasting can involve either formal or informal techniques, or both. 

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 it 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 master bedget , 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 (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.

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 ? » 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.

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 (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.

16. 14.What are the steps involved in building an activity-based budget? How do these steps differentiate 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.