Chapter 10

Budgetary Planning and Control

 Presentation Outline
I. An Overview of Budgeting
II. 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. Sales Budget
B. Production Budget
C. Direct Materials Budget
D. Direct Labor Budget
E. Overhead Budget
F. 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
A budget designed for
we so
off from only one level of
budget? 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 Original
unit Actual Budget Variance
Units produced and sold 8,000 10,000 2,000 U

Variable Overhead Costs:

Maintenance $ 0.60 $ 4,500 $ 6,000 $ 1,500 F
Indirect materials 1.40 12,000 14,000 2,000 F
Utilities 1.00 9,500 10,000 500 F
26,000 30,000 4,000 F

Fixed Overhead Costs:

Depreciation 40,000 40,000 $ -
Supervision 49,000 50,000 1,000 F
Insurance 10,000 10,000 -
Total fixed overhead 99,000 100,000 1,000 F
Total overhead costs $ 125,000 $ 130,000 $ 5,000 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
Units produced and sold 5,000 10,000 15,000

Variable Overhead Costs:

Maintenance $ 0.60 $ 3,000 $ 6,000 $ 9,000
Indirect materials 1.40 7,000 14,000 21,000
Utilities 1.00 5,000 10,000 15,000
$ 3.00 15,000 30,000 45,000

Fixed Overhead Costs:

Depreciation 40,000 40,000 40,000
Supervision 50,000 50,000 50,000
Insurance 10,000 10,000 10,000
Total fixed overhead 100,000 100,000 100,000
Total overhead costs $ 115,000 $ 130,000 $ 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