Chapter 8

CHAPTER 8

BUDGETING FOR PLANNING AND CONTROL

Learning Objectives

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

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. Describe budgets for merchandising and service firms.

CHAPTER SUMMARY

THIS CHAPTER EXPLAINS HOW BUDGETING PLAYS A KEY ROLE IN PLANNING, CONTROLLING, AND DECISION MAKING, AS WELL AS IMPROVING COMMUNICATION AND COORDINATION. THE CHAPTER FOCUSES ON THE MASTER BUDGET AND IDENTIFIES ITS MAJOR COMPONENTS. THE PROCESS OF PREPARING A SET OF OPERATING AND FINANCIAL BUDGETS FOR THE BUDGET PERIOD IS DESCRIBED WITH THE EMPHASIS ON THE INTERRELATIONSHIPS OF THE VARIOUS BUDGETS. THE CHAPTER CONCLUDES BY DESCRIBING BUDGETS FOR MERCHANDISING AND SERVICE FIRMS.

CHAPTER REVIEW

I. THE ROLE OF BUDGETING IN PLANNING AND CONTROL

Budgeting plays a crucial role in planning and control.

■ Budgets are the quantitative expressions of plans that identify an organization’s objectives and the actions needed to achieve them. They form the basis for operations.

■ Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action.

■ Budgets can be used to compare actual outcomes with planned outcomes.

Review textbook Exhibit 8-1, which illustrates the

relationship of budgets to planning, operating, and control.

A. Purposes of Budgeting

The system of budgets serves as the comprehensive financial plan for the organization as a whole.

Advantages of budgeting include:

1. Budgeting forces management to plan for the future—to develop an overall direction for the organization, foresee problems, and develop future policies.

2. Budgeting helps...