Chapter 10
The Use of Budgets in
Planning and Decision Making
1
Introduction
•Budgets are plans dealing with the
acquisition and use of resources over a
specified time period.
•Who budgets?
•Everyone from college students to
large multinational companies
2
Introduction
•Budgets aren’t just financial,
they can be in terms of:
•Time
•Acquisition and use of thousands of
different materials
•Manufacturing of hundreds of products
•Attendance at a baseball game
3
The Budget Development Process
Budgets must start with a top-down strategic
plan that guides and integrates the whole
company and its individual budgets.
4
The Budget Development Process
Budgeting is a management task,
not a bookkeeping task.
5
Budgets for Planning, Operating, and
Control
Budgeting is an integral part of the planning,
operating, and control activities of managers.
Planning:
Developing
objectives and goals
BUDGETING
Operating: Day-to-day
management decisions
Control: Insuring that
objectives and goals
are met, comparing
actual to budget
6
Advantages of Budgeting
1. The budgeting process forces communication
throughout the organization.
2. The budgeting process forces management to
focus on the future and not be distracted by daily
crises in the organization.
7
Advantages of Budgeting
continued
3. The budgeting process can help management identify
and deal with potential bottlenecks or constraints
before they become major problems.
4. The budgeting process can increase the coordination
of organizational activities and help facilitate goal
congruence.
5. The budgeting process can define specific goals and
objectives that can become benchmarks, or standards
of performance for evaluating future performance.
8
The Master Budget
•The master budget consists of an
interrelated set of budgets prepared
by a business.
•The starting point is forecasting
sales and preparing the sales
budget.
9
Budgeting for Sales
Budgets are future oriented
and make extensive use of
estimates and forecasts.
10
Cash Budgets
Many managers consider managing cash
flow to be the single most important
consideration in running a successful
business.
11
Budgeted Financial Statements
What do I do with all of
these budgets?
Using the budgets, management
prepares pro forma (budgeted)
financial statements. They are
used for internal planning
purposes and to provide
information to external users,
such as a bank, when requesting
a loan.
12
Static vs. Flexible Budgets
What if my sales are
not what I projected?
Static budgets are set at the
beginning of the period and
remain constant throughout the
budget period.
Flexible budgets take differences
in cost and revenue due to volume
differences out of the analysis by
budgeting for labor (and other
costs) based on the actual number
of units produced.
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Static vs. Flexible Budgets
Flexible budgets are based on the
actual number of units produced
rather than the budgeted units of
production.
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