Chapter 10
Budgetary Planning and Control
Presentation Outline
I.
II.
An Overview of Budgeting
The Master Budget and Selected Budget
Formats
I. An Overview of Budgeting
A. The Stages of Budgeting
B. Developing the Budget
A. The Stages of Budgeting
1. Planning
2. Control
1. Planning
The budget process
forces managers to
consider carefully
their goals and
objectives and to
specify means of
achieving them.
2. Control
Budgets provide a means of
evaluating performance.
Potential causes of significant
deviations from budgets include:
 Budget was poorly conceived.
 Conditions have changed since
the budget was prepared.
 Managers have done a
particularly good or poor job.
B. Developing the Budget
1. The Budget Committee
2. The Budget Time Period
3. Zero Base Budgeting
1. The Budget Committee
Various budgets are
approved by a budget
committee that is
composed of senior
managers such as the
president, CFO, VP of
operations, and the
controller. Budgets may
be developed with either
a top-down or bottom-up
approach.
2. The Budget Time Period
Budgets may cover a
variety of time periods
including a month,
quarter, year, or even
longer. Generally,
longer budget periods
provide less detail.
3. Zero Base Budgeting
Budgets are often adjusted up
or down on the basis of a
previous period adjusted for
current conditions. Zero
base budgeting requires that
all budget amounts be
currently justified even if
they were supported in prior
budgets. Due to the cost of
the process, this zero base
budgeting is often not used
in business.
II. The Master Budget and
Budget Formats
A. A Formal Summary of Company Plans
B. Selected Budget Formats
The master
budget
coordinates the
organization’s
activities.
A. A Formal Summary of
Company Plans
It sets specific targets
for sales, production,
selling and admin.,
and capital
acquisitions.
It culminates a
budgeted income
statement, balance
sheet, and cash receipt
and disbursement
summary.
III. Selected Budget Formats
A.
B.
C.
D.
E.
F.
Sales Budget
Production Budget
Direct Materials Budget
Direct Labor Budget
Overhead Budget
Cash Receipts and Disbursements Budget
A. Sales Budget
Projected sales
x Selling price per unit
= Budgeted sales revenue
B. Production Budget
Budgeted sales in units
+ Desired ending inventory of finished goods
= Total needs
- Beginning inventory of finished goods
= Units to be produced
C. Direct Materials Budget
Units to be produced
x Cost of parts per unit
= Cost of parts needed for production
+ Desired ending inventory of parts
= Total needed
- Beginning inventory of parts
= Cost of purchases
D. Direct Labor Budget
Direct labor hours per unit
x Labor rate per hour
= Direct labor cost per unit
x Units to be produced
= Total direct labor cost
E. Overhead Budget
Units to be produced
x Variable costs per unit
= Total variable overhead
+ Budgeted fixed overhead
= Total budgeted overhead
- Noncash expenses
= Cash disbursements for overhead
F. Cash Receipts and Disbursements
Budget
Cash receipts
- Cash disbursements
= Excess (deficiency) of cash
available over disbursements
+ Beginning cash balance
= Ending cash balance
IV. Static v. Flexible Budget
A. Static Budget
B. Static Budget Illustration
C. Flexible Budget
D. Flexible Budget Illustration
A. Static Budget
Why are
we so
off from
budget?
A budget designed for
only one level of
activity. Differences
from the budget can be
misleading when an
organization actually
operates at a different
level of activity.
B. Static Budget Illustration
Standard
cost per
unit
Actual
8,000
Units produced and sold
Variable Overhead Costs:
Maintenance
$
Indirect materials
Utilities
Fixed Overhead Costs:
Depreciation
Supervision
Insurance
Total fixed overhead
Total overhead costs
0.60
1.40
1.00
$
4,500
12,000
9,500
26,000
40,000
49,000
10,000
99,000
$ 125,000
Original
Budget
10,000
$
Variance
2,000 U
6,000
14,000
10,000
30,000
$
1,500
2,000
500
4,000
40,000
50,000
10,000
100,000
$ 130,000
$
1,000 F
1,000 F
5,000 F
$
F
F
F
F
C. Flexible Budget
A budget designed to
cover a range of
activity. Can be used
to compare actual
costs incurred to
budgeted costs around
that level of activity.
D. Flexible Budget Illustration
Standard
cost per unit
Units produced and sold
Variable Overhead Costs:
Maintenance
$
Indirect materials
Utilities
$
Fixed Overhead Costs:
Depreciation
Supervision
Insurance
Total fixed overhead
Total overhead costs
Units
10,000
5,000
0.60
1.40
1.00
3.00
$
3,000
7,000
5,000
15,000
40,000
50,000
10,000
100,000
$ 115,000
$
6,000
14,000
10,000
30,000
40,000
50,000
10,000
100,000
$ 130,000
15,000
$
9,000
21,000
15,000
45,000
40,000
50,000
10,000
100,000
$ 145,000
Summary
Planning and control stages of budget
Budget committees, time periods, zero
based budgeting
Formal plan culminating in projected
financial statements
Budget formats
Static and flexible budgets