COST MANAGEMENT

Accounting & Control

HansenMowenGuan

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.

Study Objectives
1. Define budgeting, and discuss its role in planning, controlling, and
decision making.
2. Prepare the operating budget, identify its major components, and
explain the interrelationships of the various components.
3. Identify the components of the financial budget, and prepare a
cash budget.
4. Define flexible budgeting, and discuss its role in planning, control,
and decision making.
5. Define activity-based budgeting, and discuss its role in planning,
control, and decision making.
6. Identify and discuss the key features that a budgetary system
should have to encourage managers to engage in goal-congruent
behavior.
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The Role of Budgeting

in Planning and Control

The Role of Budgeting

in Planning and Control
Types of budgets
Master budget
Operating budgets
Financial budgets

Time frame
Annual period
Multi-year rolling budget

The Role of Budgeting

in Planning and Control
Gathering information
Forecasting sales
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

Preparing the Operating Budget

Schedule 2 (in thousands)

Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget

Preparing the Operating Budget

Schedule 3 (in thousands)

* Follows the inventory policy of having 8 million pounds of materials on hand at the end of the first and second quarters and 5 million pounds on hand
at the end of the third and fourth quarters.

Goes to Cost of Goods Sold Budget

Preparing the Operating Budget

Schedule 4 (in thousands)

Starting point for Overhead Budget

Goes to Cost of Goods Sold Budget

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Preparing the Operating Budget

Schedule 5 (in thousands)

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

Goes to Cost of Goods Sold Budget

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Preparing the Operating Budget

Schedule 6 (in thousands)

Amounts taken from Schedule 3.

Amounts taken from Schedule 4.

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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Preparing the Operating Budget

Schedule 7 (in thousands)

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

Goes to Budgeted Income Statement

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Preparing the Operating Budget

Schedule 8 (in thousands)

Goes to Budgeted Income Statement

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Preparing the Operating Budget

Schedule 9 (in thousands)

Goes to Budgeted Income Statement

15

Preparing the Operating Budget

Schedule 10 (in thousands)

Goes to Budgeted Income Statement

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Preparing the Operating Budget

Schedule 11 (in thousands)

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Operating Budgets for

Merchandising and Service Firms
Merchandising
Merchandise purchases replaces production
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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Preparing the Financial Budget

Cash 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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Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued on next slide)

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Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued from previous slide)

(Continued on next slide)

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Preparing the Financial Budget

Schedule 12 (in thousands)

(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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Preparing the Financial Budget

Schedule 13 (in thousands)
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
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11).

Shortcomings of the Traditional

Master Budget Process
Departmental orientation
Plan from resources to outputs
Does not recognize interdependencies among
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
for Planning and Control
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

Flexible budgets
Variable budget
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
for Planning and Control
Flexible budget
performance report
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
for Planning and Control
Flexible budget
performance report
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

Managerial
performance report
Flexible budget 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

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

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

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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 Budgets
Traditional budgeting relies on functional-based
line items.

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Activity-Based Budgets
Flexible budgeting uses cost behavior to split
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

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The Behavioral Dimension

of Budgeting
Characteristics of a good budgetary
system
Frequent feedback on performance
Monetary and nonmonetary incentives
Participative budgeting
Realistic standards
Controllability of costs
Multiple measures of performance
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COST MANAGEMENT
Accounting & Control
HansenMowenGuan

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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