This document provides an overview of Week 2 topics in an accounting course, which include analyzing budgets, forecasts, and strategic plans. It defines budgets as formal expressions of management plans and objectives for a time period. The document discusses different types of budgeting software and the benefits and downsides of budgets. It also distinguishes between strategic plans, budgets, and forecasts. Finally, it provides an example of preparing a performance report using a static budget versus a flexible budget.

1. WMBA 6050: Accounting for Management Decision Making
Week 2 Weekly Briefing
Welcome to Week 2! In Week 1, you were introduced to
accounting as the language of
business. You looked at various annual reports and compared
the contents. You
noticed that some items occurred in every annual report. These
were the Management
Discussions and Analysis (MD&A), the four basic financial

2. statements, the report of the
independent auditors, and the notes to the financial statements.
You began to build an
accounting vocabulary, learned the interrelationship between
the four basic financial
statements, discussed fraud issues, and studied the difference
between financial
accounting and managerial accounting.
In Week 2, you will continue to build your accounting
vocabulary as you study the
budgeting aspect of management accounting.
This week:
In terms of the specific Learning Objectives, you will:
• Analyze the influence of financial and managerial
accounting on decision making
• Evaluate forecasts, strategic plans, and budgets on
organizations
• Analyze stakeholder involvement in budgeting processes
• Prepare performance reports
• Analyze performance report results
• Evaluate variances
In terms of the course-level Learning Outcomes, you will:
• Evaluate various accounting measures and their relevance
to a wide range of
stakeholders
• Analyze various types of budgets, strategic planning, and
forecasting
• Employ managerial accounting approaches and
information to make effective

3. decisions
• Demonstrate effective communication skills to present
accounting information to
stakeholders
• Assess managerial accounting tools and their usefulness to
organizational
leaders
• Apply accounting principles ethically and appropriately to
personal and
professional contexts
Budgets
A budget is defined as "the formal expression of plans, goals,
and objectives of
management that covers all aspects of operations for a
designated time period." (Shim,
Siegel, & Shim, 2012) It can be as simple as a handwritten
piece of paper for a small
© 2014 Laureate Education, Inc. Page 1 of 6

4. one-person company that lists the anticipated revenues for the
month followed by the
expected bills that must be paid, or it can be elaborate
computer-based financial
modeling software. Listed below are some commonly used
budgeting software
products. There are pros and cons to different types of software
and each organization
needs to find a product that fits its needs.
• Advisory Board Company. (2013). ActiveStrategy
[Computer software].
Retrieved from www.activestrategy.com
• Centage. (2014). Budget Maestro [Computer software].
Retrieved from
http://centage.com/Products/Budget-Maestro-Overview.asp

5. • Host Analytics. (2014). Host Budget [Computer software].
Retrieved from
www.hostanalytics.com
• Microsoft Dynamics. (2014). FRx Software [Computer
software]. Retrieved from
www.microsoft.com/en-us/dynamics/products/frx.aspx
• SAP. (n.d.). Retrieved from www.sap.com
• SAS Institute. (n.d.). Retrieved from www.sas.com
A budget has many benefits. It requires management to
formalize goals and define
objectives. It is an early warning system for potential problems,
facilities the
coordination of activities within the organization, keeps
management apprised of the
overall operations of the organization, and helps to motivate
employees to meet the
goals set in the budget (Weygandt, Kimmel, & Kieso, 2010).
Budgets do have a downside. They are time consuming to
prepare, may not use
realistic data, may encourage "playing the system,” and can
cause rifts between
departments instead of encouraging sharing of resources
(Zimmerman, 2014). If
managers' pay is based partially on meeting budget goals, there
is a strong incentive to
distort budgets so they are easier to achieve. If managers know
their budgets will be cut
if they do not spend their entire allocation (budget lapsing),
they may decide to spend

6. the money on unnecessary purchases to preserve the budget
amounts for the next
budget cycle.
Even though there are many benefits to properly prepared
budgets, they cannot exist in
a vacuum. They require the existence of predictive ability; clear
channels of
communication, authority, and responsibility; accurate, reliable,
and timely financial
information; and support from all levels of the organization.
(Shim, et al., 2012)
Strategic Plans, Budgets, and Forecasts
Some people confuse, strategic plans, budgets, and forecasts,
but they are not the
same. The strategic plan is the vision set by upper management
for a period of time
which is usually not less than three years and may span up to 10
years. It sets broad
goals to be achieved during the designated time frame (Schiff,
2008).
For example, the strategic plan might call for revenues to
increase 5% per year and
expenses to decrease by 7% per year. There are usually no
details given as to how
© 2014 Laureate Education, Inc. Page 2 of 6
http:www.sas.com
http:www.sap.com
www.microsoft.com/en-us/dynamics/products/frx.aspx
http:www.hostanalytics.com
http://centage.com/Products/Budget-Maestro-Overview.asp

7. http:www.activestrategy.com
these results will be achieved. The plan is intended to show
investors, board members,
and other levels of management, the future direction of the
organization.
The budget gives the details as to how the goals outlined in the
strategic plan are to be
achieved. It will have input from many levels within the
organization, and will give line by

8. line details of expected revenues and expenses that are aligned
with the goals defined
in the strategic plan. No matter how much care is taken to
develop accurate budgets, as
the actual numbers come in, there will be differences. Revenues
may be less than
predicted and expenses may be higher. It is possible that
revenues will be greater than
expected and the related expenses will also be higher.
At this point, forecasts come into play. They use the actual
numbers to more accurately
predict where the organization is headed. Forecasts do not
change the budget, but
rather enhance its usefulness as they allow managers to make
determinations based on
current data. For example, if a department has a monthly budget
of $50,000, and has
spent $30,000 by the 15th of the month, some decisions will
have to be made regarding
expenditures for the rest of the month. The forecast data fall
between the high-level
strategic plan and the very detailed budgets (Schiff, 2008).
Performance Reports
Once actual data are received, a performance report can be
prepared. A fictional
company, the Teddy Bear Toy Company, will be used in the
following paragraphs to
illustrate how you can read and interpret data to prepare a
meaningful performance
report.
Teddy Bear Toys is a small company dedicated to making
stuffed teddy bears out of

9. various materials such as flannel, fake fur, and suede. The
operations manager has
prepared a report on data from the production department.
Based on the report, she
wants to let the production department manager know that if
this situation is not fixed
quickly, she will be looking to hold you accountable. Here is
the report that you are
given.
Teddy Bear Toy Company
Manufacturing Overhead Static Budget Report
For the Month Ended June 20XX
Budget Actual Variance (U or F)
Number of teddy bears produced 25,000 30,000 5,000F
Costs:
Indirect labor $ 65,000 $ 78,000 $13,000U
Supplies $ 62,500 $ 73,750 $11,250U
Utilities $ 47,500 $ 56,250 $ 8,750U
$175,000 $208,000 $33,000U
© 2014 Laureate Education, Inc. Page 3 of 6

10. You take a look at the report, and at first glance, you think,
"She is right. That manager
is not doing the job. He is not controlling costs." As you think
about the report, you
realize that the budget called for 25,000 teddy bears to be
produced, but in actuality,
30,000 bears were produced. Of course, there will be more
costs! You decide to
prepare a flexible budget at the 30,000 unit level of activity.
First, determine budgeted costs per bear by dividing the
budgeted amount for each cost
by the budget level of production.
Indirect labor: $65,000/25,000 bears = $2.60 per bear.
Supplies: $62,500/25,000 bears = $2.50 per bear.
Utilities: $47,500/25,000 bears = $1.90 per bear.
Next, multiply the per bear amount for each cost by the actual
number of bears
produced.

11. Indirect labor: $2.60 per bear x 30,000 bears = $78,000
Supplies: $2.50 per bear x 30,000 bears = $75,000
Utilities: $1.90 per bear x 30,000 bears = $57,000
Finally, prepare a performance report for manufacturing
overhead for the production
department.
© 2014 Laureate Education, Inc. Page 4 of 6

12. Teddy Bear Toy Company
Performance Report—Production Department
For the Month ended June 20XX
I II III IV V
Manufacturing Overhead
Costs
Indirect labor
Static
Budget
$ 65,000

13. Actual
$ 78,000
Variance
(II–I)
$ 13,000 U
Flexible
Budget
(at 30,000)
$ 78,000
Variance
(II–IV)
$ -
Supplies $ 62,500 $ 73,750 $ 11,250 U $ 75,000 $ 1,250 F
Utilities $ 47,500 $ 56,250 $ 8,750 U $ 57,000 $ 750 F
Total $175,000 $208,000 $ 33,000 U $ 210,000 $ 2,000 F
The manager of the production department is doing a great job
of controlling costs.
When a flexible budget is used, it is easy to see that the costs
are below what is
budgeted for a production of 30,000 teddy bears. You need to
explain to the operations
manager that she should gauge performance against the actual
level of activity, not

14. against the static budget numbers. In addition, the production
department manager
should be complimented for staying within the budget for the
actual level of activity.
In summary, this week you added the following terms to your
accounting vocabulary:
budgets, strategic plans, forecasting, static budgets, and flexible
budgets. You also
learned how to change a static budget into a flexible budget in
order to compare actual
costs incurred to budgeted costs at the same level of activity.
When budgets are
prepared carefully and used properly, they can help managers
make educated
decisions that will help guide the organization toward its goals.
References
Advisory Board Company. (2013). ActiveStrategy [Computer
software]. Retrieved from
www.activestrategy.com
Centage. (2014). Budget Maestro [Computer software].
Retrieved from
http://centage.com/Products/Budget-Maestro-Overview.asp
Host Analytics. (2014). Host Budget [Computer software].
Retrieved from
www.hostanalytics.com
Microsoft Dynamics. (2014). FRx Software [Computer
software]. Retrieved from
www.microsoft.com/en-us/dynamics/products/frx.aspx
SAP. (n.d.). Retrieved from www.sap.com

15. © 2014 Laureate Education, Inc. Page 5 of 6
http:www.sap.com
www.microsoft.com/en-us/dynamics/products/frx.aspx
http:www.hostanalytics.com
http://centage.com/Products/Budget-Maestro-Overview.asp
http:www.activestrategy.com
SAS Institute. (n.d.). Retrieved from www.sas.com
Schiff, C. S. (2008, August). Requirements for budgeting,
planning and forecasting. DM
Review, (18)8, 26–27.
Shim, J. K, Siegel, J. G., & Shim, A. I. (2012) Budgeting basics
and beyond (4th ed.).
Hoboken, NJ: John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010)
Managerial accounting: Tools for
decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.
Zimmerman, J. L. (2014). Accounting for decision making and
control (8th ed.). New
York, NY: McGraw-Hill.

16. © 2014 Laureate Education, Inc. Page 6 of 6
http:www.sas.com
Costs: Indirect labor: Supplies: UtilitiesRow1: