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CHAPTER NINE
The Use of Budgets in Planning and Decision Making
The concept of budgeting and how budgets assist managers in planning
and decision making is introduced here. This chapter discusses and
demonstrates the preparation of operational budgets for a traditional
Key Concepts
• Budgets must start with a top-down strategic plan that guides and
integrates the whole company and its individual budgets.
• Budgets are future oriented and make extensive use of estimates and
forecasts.
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Learning Objectives
LO1— Describe the budget development process, behavioral implications
of budgeting, advantages of budgeting, and the master budget
LO2— Explain how managers develop a sales forecast and demonstrate
the preparation of a sales budget
LO5— Explain the importance of budgeting for cash and prepare a cash
receipts budget, a cash disbursements budget, and a summary
cash budget
Chapter 9 – The Use of Budgets in Planning and Decision Making
Lecture Outline
A. Introduction
o Budgets are plans dealing with the acquisition and use of
B. The Budget Development Process (LO1)
1. Participation in the Budget Development Process
o Participatory budgeting starts with departmental heads and
2. Behavioral Implications of Budgeting
o Conflicts arise when budgets are used for both planning and
3. Advantages of Budgeting
o The budgeting process compels communication to occur
Key Concept
Budgets must start with a top-down strategic plan that guides and integrates
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4. The Master Budget
o The master budget consists of an interrelated set of budgets.
o The budget starts with forecasting sales and preparing a
sales budget.
C. The Sales Budget (LO2)
o The sales forecast and the sales budget are the start points
D. Production Budget (LO3)
o The next step in the budget process after the sales budget is
the production budget.
o Required production = Projected sales +/– Changes in
finished goods inventory.
Key Concept
Chapter 9 – The Use of Budgets in Planning and Decision Making
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E. Material, Labor, Overhead, and Selling and Administrative Expense Budgets
(LO4)
1. Material Purchases Budget
2. Direct Labor Budget
3. Manufacturing Overhead Budget
o Preparation of this budget involves estimating overhead
4. Selling and Administrative Expense Budget
o A selling and administrative expense budget includes
F. Cash Budgets (LO5)
1. Why Focus on Cash?
2. The Cash Receipts Budget
Key Concept
Preparing budgets for material purchases direct labor, overhead, and
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3. The Cash Disbursements Budget
o The cash disbursements budget includes cash outflows
resulting from operating activities and selling and
administrative costs.
4. Summary Cash Budget
o The summary cash budget is then prepared. It has three
sections.
a. Cash flows from operating activities
G. Budgeted Financial Statements (LO6)
o Budgeted statements are used both for internal planning and
Key Concept
Preparing budgets, or pro forma, financial statements allows managers to
Chapter 9 – The Use of Budgets in Planning and Decision Making
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H. Budgets for Merchandising Companies and Service Companies (LO7)
o Service companies need to prepare sales budgets and
I. Static versus Flexible Budgets (LO8)
o Static budgets are set at the beginning of the period and
End-of-Chapter Material
This chapter has many very good short and medium-length budgeting problems
Key Concept
A primary focus of budgeting in a service company is on labor (e.g., at time
budget).
Key Concept