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CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL Budgeting is one topic that most of you can relate to since you are involved with your own personal budgets. Failure to plan, either formally or informally, can lead to financial disaster. Careful planning is vital to the health of any organization. We can look at a department’s budget from three perspectives: a traditional functional-based approach, a flexible budgeting approach, and an activity-based approach. All three budgeting methods are discussed in Chapter 8. LEARNING OBJECTIVES After studying Chapter 8, 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. Define flexible budgeting, and discuss its role in planning, control, and decision making. 5. Define activity-based budgeting, and discuss its role in planning, control, and decision making. 6. Identify and discuss key features that a budgetary system should have to encourage managers to engage in goal-congruent behavior. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic): 1. The Role of Budgeting in Planning and Control (LO 1) 2. Preparing the Operating Budget (LO 2) 3. Preparing the Financial Budget (LO 3) 4. Flexible Budgets for Planning and Control (LO 4) 5. Activity-Based Budgets (LO 5) 6. The Behavioral Dimension of Budgeting (LO 6) I. THE ROLE OF BUDGETING IN PLANNING AND CONTROL You need to understand what a budget is and the role budgeting plays in an organization. You may want to start a discussion by asking yourself the following two questions: What is a budget? What are the purposes of budgeting? Planning and control should emerge as two major purposes. Budgets are the quantitative expressions of management’s plans, stated in either physical or financial terms or both. Budgets are the means used to translate the goals and objectives of an organization into operational terms. By comparing actual outcomes with planned outcomes, budgets also can be used to control. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates significantly from planned performance. It is important to understand that budgets are the outgrowth of strategic planning and that they play a vital
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This note was uploaded on 11/14/2009 for the course ACC 2338 taught by Professor Tba during the Fall '09 term at Randolph College.

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