Budgeting for Planning and Controlling

Putu Agus Ardiana

Faculty of Economics and Business
Udayana University, Indonesia
Description of Budgeting
Goal congruence
While short-term plans must address short-
term needs, they must also include actions
that contribute to longer-term success
Fail in planning means planning a failure
Budgeting, Planning, and Controlling (1)
Planning and controlling are inextricably
linked
Planning is looking ahead to see what action
should be taken to realize particular goals
Control is looking backwards, determining
what actually happened and comparing it with
the previously planned outcomes
The comparison can then be used to adjust
the budget, looking ahead once more
Budgeting, Planning, and Controlling (2)
Budgets are financial plans for the future
identifying objectives and the action required
to achieve them
Before a budget is prepared, an organization
should develop a strategic plan
Strategic plan identifies strategies for future
activities and operations, generally covering at
least five years
Strategic Plan
Budgets
Long-Term
Objectives
Investigation
Monitoring of
Actual Activity
Comparison of
Actual with Planned
Feedback
Short-Term
Objectives
Short-Term Plan
Corrective
Action
Planning Controlling
Budgeting, Planning, and Controlling (3)
The Advantages of Budgeting
It forces managers to plan
It provides information that can be used to
improve decision making
It provides a standard for performance
evaluation
It improves communication and coordination
Preparing the Master Budget (1)
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 financial year of the
company
Yearly budgets are broken down into quarterly
and monthly budgets
The use of smaller time periods allows managers
to compare actual data with budgeted data more
frequently, so problems may be noticed and
solved sooner
Preparing the Master Budget (2)
Some organizations have developed a continuous
budgeting philosophy
A continuous budget is a moving 12-month
budget. As a month expires in the budget, an
additional month in the future is added so that
the company always has a 12-month plan on
hand
Proponents of continuous budgeting maintain
that it forces managers to plan ahead constantly

Major Components of Master Budget (1)
Operating budget describes the income-generating
activities of a firm: sales, production, and finished goods
inventories
The ultimate outcome of the operating budget is a pro-
forma or budgeted income statement
Financial budget details the inflows and outflows of cash
and the overall financial position
Planned cash inflows and outflows appear in the cash
budget
The expected financial position at the end of the budget
period is shown in a budgeted or pro-forma balance sheet
Operating budget is prepared first then financial budget
Major Components of Master Budget (2)
The operating budget consists of a budgeted
income statement accompanied by the following
supporting schedules:
The sales budget
The production budget
The direct materials purchases budget
The direct labor budget
The overheads budget
The ending finished goods inventory budget
The cost of goods sold budget
The selling and administrative expenses budget
Major Components of Master Budget (3)
The remaining budgets found in the master
budget are the financial budgets. They are:
The cash budget
The budgeted balance sheet
The budgeted for capital expenditures
Sales
Budget
Long-Term Sales
Forecast
Direct Materials
Purchases Budget
Production
Budget
Overheads
Budget
Direct Labor
Budget
Selling and
Administrative
Expenses
Budget
Ending Finished Goods
Inventory Budget
Cost of Goods Sold
Budget
Budgeted Income
Statement
Cash Budget
Budgeted
Balance
Sheet
Budgeted
Statement of
Cash Flows
Capital Budget
(Unit Cost)
The Master Budget
and Its Relationship
Using Budgets for Performance Evaluation:
Static Budgets Vs Flexible Budgets
Budgets are useful control measures
To be used in performance evaluation, however,
two major considerations must be addressed:
How budgeted amounts should be compared with
actual results
The impact of budgets on human behavior
Static budget is a budget for a particular level of
activity
Flexible budget is a budget that enables a firm to
calculate expected costs for a range of activity
levels
Actual Budgeted Variance
Units produced 1,300 1,220 80 F
Direct materials cost $9,105 $8,601 $(504) U
Direct labor cost $3,120 $2,928 $(192) U
Overheads:
Variable:
Supplies $580 $549 $(31) U
Power $184 $183 $(1) U
Fixed:
Supervision $1,055 $1,105 50 F
Depreciation $540 $540 0
TOTAL $14,584 $13,906 $(678) U
Using Budgets for Performance Evaluation:
A Static Budget
A Flexible Budget (1)
Production Costs
Variable Cost
per Unit
Range of Production (Units)
1,000 1,200 1,300
Variable:
Direct materials $7.05 $7,050 $8,460 $9,165
Direct labor $2.40 $2,400 $2,880 $3,120
Variable overheads:
Supplies $0.45 $450 $540 $585
Power $0.15 $150 $180 $195
Total variable costs $10.05 $10,050 $12,060 $13,065
Fixed overheads:
Supervision $1,105 $1,105 $1,105
Depreciation $540 $540 $540
Total fixed costs $1,645 $1,645 $1,645
Total production costs $11,695 $13,705 $14,710
A Flexible Budget (2)
Actual Budgeted Variance
Units produced 1,300 1,300 0
Direct materials cost $9,105 $9,165 $60 F
Direct labor cost $3,120 $3,120 0
Variable Overheads:
Supplies $580 $585 $5 F
Power $184 $195 $11 F
Total variable costs $12,989 $13,065 $76 F
Fixed Overheads:
Supervision $1,055 $1,105 $50 F
Depreciation $540 $540 0
Total fixed costs $1,595 $1,645 $50 F
TOTAL PRODUCTION COSTS $14,584 $14,710 $126 F
The Behavioral Dimension of Budgeting (1)
Since a managers financial status and career
can be affected, budgets can have a significant
behavioral effect
The alignment of managerial and
organizational goals is often referred to as goal
congruence
Dysfunctional behavior is individual behavior
that is in basic conflict with the goals of the
organization
The Behavioral Dimension of Budgeting (2)
An ideal budgetary system is one that
simultaneously drives managers to achieve the
organizations goals in an ethical manner
The ideal system probably doesnt exist but
research and practices have identified some key
features that promote a reasonable degree of
positive behavior including frequent feedback on
performance, monetary and non-monetary
incentives, participating budgeting, realistic
standards, and controllability of costs and
multiple measures of performance
Participative Budgeting
Participative budgeting allows subordinate
managers considerably say in how the budgets
are established
However, participative budgeting has three
potential problems:
Setting standards that are either too high or too low
Building slack into the budget (padding the budget) by
underestimating revenue or overestimating expenses
Incurring pseudo-participation
Thank You