Profit Planning
Group III
Mark Garillo
Alma Carin
Marvine Madayag
Andree Silvestre
Nathaniel Acosta
Johnny Shu
Francis Joseph De Leon
Budget Committee
Chairman of the Board
Mark Garillo
Chief Financial Officer
Nathaniel Acosta
President
Andree Silvestre
VP Finance Operation
Francis Joseph De Leon
VP – Marketing
Jhonny Shu
VP Sales
Marvine Madayag
VP Operations
Alma Carin
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Understand the purpose of a budget
Understand the processes an organization
use to create budget
Understand basic budgeting and the
behavioural aspects of budgeting
Understand the concept of preparing a
Master Budget
Understand the costs and benefits of
budgeting
Understand the concept of Flexible budget
and activity variance
Objectives
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Quantitative Plan for acquiring and using
resources over a specific time period
Is a formal expression of plans, goals, and
objectives of management. It covers all aspects
of operations for a specific time period.
What is a budget?
Planning
 Controlling

Purpose or uses of budgeting
Communicate
plans
Define goals
and
objectives
Think about
and plan for
the future
Benefits
Means of
allocating
resources
Coordinate
activities
Uncover
potential
bottlenecks
Benefits of budgeting
Time
consuming
and costly
Negative
employee
reactions
Costs
Limited
flexibility
Costs of budgeting
Unrealistic
and
inaccurate
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Natural demand for the project
Length of the trade cycle
Production cycle
Functional areas covered by the budget
Need for the control of operations
Time necessary for financing production
well in advance of actual needs
The accounting period
Factors for determining budget
period
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Annual budget (a budget prepared for 1
fiscal year).
Continuous (Rolling) budget
Flexible (Variable) budget -budget
prepared for different levels of activity
Fixed (Static) budget – budget based on
one level of activity
Long range budget – more than 1 year
Types of budgets
Bottom-up Budgeting
Top-down Budgeting
Top
Management
Top
Management
Middle
Management
Middle
Management
Lower-level
Management
Lower-level
Management
Budget process
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Normally used by government agencies,
universities and organizations relaying on
allocated funds.
Any unused funding at the end of the financial
period cannot be carried out forward to the
following year
As a result, following year’s budget may be cut
because of the under-expenditure in the previous
year.
Budget Lapsing
It helps ensure that appropriate level of
resources is utilized. Without budget
lapsing the, risk-adverse manager may
unnecessarily accumulate funds and this
may adversely affect the performance of
the organization
 It helps provide an opportunity for a clean
cut-off of expenditures and to reallocate
any unused resources for other more
appropriate requirements
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Budget lapsing: Advantages
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Can cause undesired behavior effects.
◦ E.g. Managers may wastefully spend their
entire budget before the end of the period in
order to avoid budget cuts
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A system of reviewing the expenditures
near end of the period my uncover
unnecessary expenditures and discourage
manager to wastefully spend because of
budge lapsing
Budget lapsing: Potential
Problem and Solution
Incremental Budget -is
budgeting based on
slight changes from the
preceding period's
budgeted results or
actual results. (based
on historical data)
 Zero-based budget starts from a "zero
base" and every
function within an
organization is analyzed
for its needs and costs
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Incremental vs. Zero-based
budget
Budget Com Members
 President
 Vice President – in charge of
various functions (Sales,
Production, Marketing,
Procurement or SC and the
Controller)
 Managers involve in the budget
planning
Budget Com Responsibilities
 Overall policy matters relating
to budget program.
 Coordinate the preparation of
the budget
 Resolving disputes related to
the budget
 Approving the final budget
What are the roles and responsibilities
of the budget committee
Sales Forecast
Production
Budget
Material usage
and purchases
Direct labor
costs
Selling,
administrative,
and other
expenses
Cost of goods
sold
Ending
inventory levels
Manufacturing
overhead costs
Cash budget
Financial
Position and
Statement of
Cash Flows
Capital
Expenditure
Income
statement
Steps in formulating a Master
Budget
Master budget interrelationship
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It consist of number of separate but interdependent budget that
formally lay out the company’s sales, production and financial
goals
What is master budget
How to Generate the Master
Budget?
1st Identify the last year’s
actual sales
2nd Identify the process for
budgeting
The board of directors will
set the target sales for the
specific year
Then it will send to
the COO and
set the meeting to
Finance, Marketing,
and Advertising
Heads
Who will sell?
How do we sell?
Send to Marketing for
proper sub division of the
set budget
Example:
10B / 5 Division = 2B in
each Division
Marketing Manager
Marketing Group 1
Marketing Group 2
Marketing Group 4
Marketing Group 3
Marketing Group 5
QUOTA
In a monthly basis
They will check the
inventories if sufficient, and
if not???
Set the meeting with
Construction Team and
Business Development Team
Formulate strategies
Set the meeting with the
Treasury for proper
funding
How do we capitalize:
Construction?
Either we set:
Collection
Bonds
Bank Financing
A.
Operating budget
1. Sales budget/forecast
2. Production budget
a) Material purchase and usage
b) Direct labor costs
c) Factory overhead costs
d) Inventory levels
3. Cost of goods sold budget
4. Selling and administrative expense budget
5. Other expense related budgets
B.
Financial budget
1. Cash (forecast) budget
a) Cash receipt
b) Cash disbursement
2. Budgeted income statement
3. Budgeted balance sheet
4. Budgeted statement of cash flows
C.
Special budget
1. Performance budgets
2. Cash budgets
Sub-parts of Master Budget
Flexible Budget and
Performance Analysis
Group III
Mark Garillo
Alma Carin
Marvine Madayag
Andree Silvestre
Nathaniel Acosta
Johnny Shu
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Learn the concept of Flexible budget and
variance
Prepare a flexible budget.
Prepare a report showing activity
variances.
Prepare a report showing revenue and
spending variances.
Prepare a performance report that
combines activity variances and revenue
and spending variances.
Learning Objectives
Static Planning (or fixed) budget – a budget
based on one level of activity.
Flexible Budget –
 a budget based on different levels of activity.
Types of Budget
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Static Planning (or fixed) budgets are prepared for a
single, planned level of activity. Performance evaluation is
difficult when actual activity differs from the planned level of
activity. Comparing static planning budgets with actual costs
is like comparing “apples and oranges”.
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Flexible budgets show costs that should have been
incurred at the actual level of activity, enabling “apples
to apples” cost comparisons.
Types of Budget
Deficiencies of Static Budget
Deficiencies of Static Budget
Deficiencies of Static Budget
Relevant Question –
“How much of the cost variances is due to
higher activity, and how much is due to
cost control?”
Deficiencies of Static Budget
The most common errors in preparing
performance reports are to implicitly
assume that –
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All costs are fixed or that
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All costs are variable.
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Some Common Errors
To FLEX a budget we need to know that:
◦ Total variable costs change in direct proportion to
changes in activity.
◦ Total fixed costs remain unchanged within the
relevant range.
Preparing a Flexible Budget
Preparing a Flexible Budget