Chapter 8

Budgeting for Planning

and Control
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

The Role of
Budgeting
in Planning and
Control

The Role of
Budgeting
Types of budgets
in Planning and
Master budget
Control
Operating budgets
Financial budgets

Time frame
Annual period
Multi-year rolling budget

The Role of
Budgeting
Gathering information
in
Planning
and
Forecasting sales
Control
Forecasting other variables
The master budget starts with the sales
forecast, which is basis for the sales
budget.
All other operating and most financial
budgets are generated from the sales
budget.

The Role of
Budgeting
in Planning and
Control

Preparing the
Operating Budget

The first budget is the sales budget which is based on the

sales forecast.
Schedule 1 (in thousands)

Starting point for Production Budget

Starting point for Marketing Expense Budget
Goes to Budgeted Income Statement
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Preparing the
Operating Budget
Schedule 2 (in thousands)

Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget
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Preparing the
Operating Budget
Schedule 3 (in thousands)

Goes to Cost of Goods Sold Budget

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Preparing the
Operating Budget
Schedule 4 (in thousands)

Starting point for Overhead Budget

Goes to Cost of Goods
Sold Budget
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Schedule 5 (in thousands)

Preparing the
Operating Budget

*Includes $200,000 of depreciation in each quarter.

Goes to Cost of Goods Sold Budget

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Schedule 6 (in thousands)

Amounts taken from Schedule 3.

Amounts taken from Schedule 4.

Preparing the
Operating Budget

Amounts taken from Schedule 5.

Budgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $5.33.

Goes to Cost of Goods Sold Budget

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Schedule 7 (in thousands)

Preparing the
Operating Budget

*Production needs $0.01 = 416,000 $0.01.

Goes to Budgeted Income Statement

12

Schedule 8 (in thousands)

Preparing the
Operating Budget

Goes to Budgeted Income Statement

13

Schedule 9 (in thousands)

Preparing the
Operating Budget

Goes to Budgeted Income Statement

14

Schedule 10 (in thousands)

Preparing the
Operating Budget

Goes to Budgeted Income Statement

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Schedule 11 (in thousands)

Preparing the
Operating Budget

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Operating Budgets
Merchandisingfor Merchandising
Merchandise purchases
replaces production
and Service
Firms
Direct materials and direct labor are not
required

For-profit service:
Sales budget is the production budget
Inventories are nonexistent

Not-for-profit service:
Budget for level and types of services provided
Statement of sources and uses replaces
income statement
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Cash budget

Preparing the
Financial Budget

Break down into short time periods

Forecast need for short-term borrowing
Forecast periods of high cash balances
+

+
+

Beginning cash balance

Cash receipts
Cash available
Cash disbursements
Minimum cash balance
Excess or deficiency of cash
Repayments
Loans
Minimum cash balance
Ending cash balance

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Schedule 12 (in thousands)

Preparing the
Financial Budget

(Continued on next slide)

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Schedule 12 (in thousands)

Preparing the
Financial Budget

(Continued from previous slide)

(Continued on next slide)

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Schedule 12 (in thousands)

Preparing the
Financial Budget

(Continued from previous slide)

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Preparing the
Financial Budget
Budgeted balance sheet
Current (actual) balance sheet
Integrate data from all other budgets

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Schedule 13 (in thousands)

Preparing the
Financial Budget

a Ending balance from Schedule

12.
b 30 percent of fourth-quarter credit
sales (0.30 $800,000); see
Schedules 1 and 12.
c From Schedule 3 (5,000,000 lbs.
$0.01).
d From Schedule 6.
e From the December 31, 2009,
balance sheet.
f December 31, 2009, balance
($9,000,000) plus new equipment
acquisition of $600,000; see the
2009 ending balance sheet and
Schedule 12.
g From the December 31, 2009,
balance sheet and Schedules 5,
8, and 10 ($4,500,000 + $800,000
+ $20,000 + $40,000).
h 20% of fourth-quarter purchases;
see Schedules 3 and 12.
i From the December 31, 2009,
balance sheet.
j $6,825,000 + $894,000
(December 31, 2009, balance
plus net income from Schedule
11).
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Shortcomings of
the Traditional
Departmental orientation
Plan from resources to
outputs
Master
Budget
Does not recognize interdependencies among
Process
departments

Static budgets
Developed for a single level of activity
Based on incremental adjustments

Results orientation
Disconnects the process from its output
Cost-cutting accomplished by across-the-board
cuts
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Flexible Budgets
for Planning and
Control

Static budget
Vital for planning
Less useful for control
Master budget
Developed around a
single level of activity
Budgeted activity
level rarely equals
actual activity

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Flexible Budgets
for Planning and
Control

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Flexible Budgets
forFlexible
Planning
and
budgets
Variable Control
budget

Static budgets
Master budget
Vital for planning
Less useful for control
Developed around a
single level of activity
Budgeted activity
level rarely equals
actual activity

Provides expected
costs for a range of
activity
Provides budgeted
costs for the actual
activity level

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Flexible Budgets
for Planning and
Control

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Flexible Budgets
Flexible budget for Planning and
performance report
Control
Compare budgeted
costs given the actual
level of activity to the
actual costs for the
same level
Locate possible problem
areas by examining the
flexible budget
variances
Examines efficiency

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Flexible Budgets
for Planning and
Control

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Flexible Budgets
and
Flexible budget for Planning
Managerial
performance report
performance report
Control
Flexible budget
Compare budgeted
costs given the actual
level of activity to the
actual costs for the
same level
Locate possible problem
areas by examining the
flexible budget
variances
Examines efficiency

variances
Actual results vs.
flexible budget
Examines efficiency
Volume variances
Static budget vs.
flexible budget
Examines
effectiveness

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Flexible Budgets
for Planning and
Control

32

Flexible Budgets
A flexible budget can be built for
five overhead
activities using three
for
Planning
and
drivers; each is budgeted for two activity levels.
Control

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Flexible Budgets
The activity-based performance
report measures
budget variancesand
for
for
Planning
each of the overhead activities.
Control

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Activity-Based
Budgets
ABB begins with output and then
determines the resources necessary to
created that output.
ABB works backwards from activities
and their drivers to the underlying
costs
Traditional budgeting relies on functionalbased line items (salaries, supplies, etc.)
Flexible budget uses cost behavior to split
functional-based line items into fixed and
variable
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Activity-Based
Traditional budgeting relies on functional-based
Budgets
line items.

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Activity-Based
Flexible budgeting uses cost behavior to split
Budgets
functional-based line items into fixed
and
variable costs.

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Activity-Based
Budgets
Steps to construct an ABB
1. Determine the units output
2. Identify the activities (and related
drivers) needed to deliver the output
3. Estimate the demand for each activity
4. Determine the cost of resources
required to produce the relevant
activities
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Activity-Based
Budgets

39

The Behavioral
Dimension
Characteristics of aof
good
budgetary
Budgeting
system

Frequent feedback on performance

Monetary and nonmonetary incentives
Participative budgeting
Realistic standards
Controllability of costs
Multiple measures of performance
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End Chapter 8

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.

Cengage Learning and South-Western are trademarks used herein under license.

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