Nama : Yudistira AKUNTANSI MANAJEMEN

NIM : 12030117140152 KELAS - E

CHAPTER 8

Budgeting for lanning and Control

Budgeting and Planning and Control

Budgets are financial plans for the future; they identify objectives and the actions needed to
achieve them. Before a budget is prepared, an organization should develop a strategic plan.
The strategic plan identifies strategies for future activities and operations, generally
covering at least five years.

Advantages of Budgeting

A budgetary system gives an organization several advantages.

1. It forces managers to plan.

2. It provides information that can be used to improve decision making.

3. It provides a standard for performance evaluation.

4. It improves communication and coordination.

Preparing the Master Budget

The master budget is the comprehensive financial plan for the organization as a whole.
Typically, the master budget is for a one-year period corresponding to the fiscal year of the
company. Some organizations have developed a continuous budgeting philosophy. A
continuous budget is a moving 12-month budget.

Directing and Coordinating

The budget committee reviews the budget, provides policy guidelines and budgetary goals,
resolves differences that arise as the budget is prepared, approves the final budget, and
monitors the actual performance of the organization as the year unfolds. The controller
usually serves as the budget director, the person responsible for directing and coordinating
the organization’s overall budgeting process.

Major Components of the Master Budget

A master budget can be divided into operating and financial budgets. Operating budgets
describe 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.
Preparing the Operating Budget

The operating budget consists of a budgeted income statement accompanied by the

following supporting schedules:

1. Sales budget 5. Overhead budget

2. Production budget 6. Selling and administrative expenses budget

3. Direct materials purchases budget 7. Ending finished goods inventory budget

4. Direct labor budget 8. Cost of goods sold budget

Sales Budget The sales budget is the projection approved by the budget committee that
describes expected sales in units and dollars. Production Budget The production budget
describes how many units must be produced in order to meet sales needs and satisfy ending
inventory requirements.

The direct materials purchases budget tells the amount and cost of raw materials to be
purchased in each time period; it depends on the expected use of materials in production
and the raw materials inventory needs of the firm. Direct Labor Budget The direct labor
budget shows the total direct labor hours needed and the associated cost for the number of
units in the production budget. Overhead Budget The overhead budget shows the expected
cost of all indirect manufacturing items.

Ending Finished Goods Inventory Budget The ending finished goods inventory budget
supplies information needed for the balance sheet and also serves as an important input for
the preparation of the cost of goods sold budget. The next budget to be prepared, the
selling and administrative expenses budget, outlines planned expenditures for
nonmanufacturing activities.

Preparing the Financial Budget

The remaining budgets found in the master budget are the financial budgets. The usual
financial budgets prepared are:

1. The cash budget

2. The budgeted balance sheet

3. The budget for capital expenditures

Bank loan officers use a company’s cash budget to document the need for cash, as well as
the ability to repay.

Budgeted Balance Sheet The budgeted balance sheet depends on information contained in
the current balance sheet and in the other budgets in the master budget. Flexible Budgets
The budget that enables a firm to compute expected costs for a range of activity levels is
called a flexible budget. Participative Budgeting Rather than imposing budgets on
subordinate managers, participative budgeting allows subordinate managers considerable
say in how the budgets are established.

Realistic Standards Budgeted objectives are used to gauge performance; accordingly, they
should be based on realistic conditions and expectations. Controllable costs are costs whose
level a manager can influence. For example, divisional managers have no power to authorize
such corporatelevel costs as research and development and salaries of top managers.

Activity-Based Budgeting

Static Activity Budgets Activities cause costs by consuming resources; however, the amount
of resources consumed depends on the demand for the activity’s output. Thus, to build an
activitybased budget, three steps are needed: (1) the activities within an organization must
be identified, (2) the demand for each activity’s output must be estimated, and (3) the cost
of resources required to produce this level of activity must be assessed.

Activity Flexible Budgeting

Activity flexible budgeting is the prediction of what activity costs will be as activity output
changes. Variance analysis within an activity framework makes it possible to improve
traditional budgetary performance reporting.