MANAGEMENT ADVISORY SERVICES
MANACC – Budgeting
• Cash budget
c. Capital investment budget
Budget
It is a financial plan of the resources
needed to carry out tasks and meet financial goals.
Budgeting Terminologies
Master Budget
It is a summary of all phases of a
company’s plans and goals for the future. It
represents a comprehensive expression of
management’s plans for the future and how these
plans are to be accomplished.
Planning
It involves the development of objectives
and preparation of various budgets to achieve
these objectives.
Control
It involves the steps taken by management
to ensure that the objectives set down at the
planning stage are attained and to ensure that all
parts of the organization function in a manner
consistent with organizational policies.
Purposes of the Budget
a. Defining objectives and goals and
formulating strategies to achieve such
objectives
b. Coordinating the activities of the
organization
c. Allocating resources
d. Communicating management’s approved
plans
e. Uncovering and preparing for potential
bottlenecks in the operations
f. Motivating managers
g. Setting a standard or benchmark for
evaluating actual performance
Hierarchy of Budgets
a. Operating budget
• Budgeted income statement
• Sales budget
• Production budget
• Materials cost budget
• Direct labor cost budget
• Factory overhead budget
• Inventory levels
• Cost of Sales budget
• Selling and Administrative expenses
budget
• Financial expense budget
b. Financial budget
• Budgeted Statement of Financial
Position
Budgeted Income Statement
It refers to projection of revenue, expenses
and results of operations for a definite period of
time.
Cash Budget
It is a period-by-period statement of:
a. Cash at the start of a budget period;
b. Expected cash receipts classified by
source;
c. Expected cash disbursements, classified
by function, responsibility and form; and
d. The resulting cash balance at the end of the
budget period.
Financial Budget
It refers to the budget of the financial
resources as reflected in the budgeted statement
of financial position and cash budget.
Static (Fixed) Budget
It refers to a projection of cost at a particular
or one level of production (usually at normal
capacity) for a definite period time period.
Flexible (Variable) Budget
It refers to a projection of cost at different
levels of production for a definite period of time.
Participative Budget
It refers to a budget prepared using
employees at all levels in the organization.
Physical Budget
It refers to a budget that is expressed in
units of materials, number of employees, or
number of man-hours or service units rather than
in pesos.
Planning Budget
It is another term for master budget.
Production Budget
It refers to a production plan of resources
needed to meet current sales demand and ensure
adequate inventory levels.
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MANAGEMENT ADVISORY SERVICES
MANACC – Budgeting
Program Budget
It refers to a budget for the major programs
or projects that the company plans to undertake.
Operating Budget
It refers to the plans for the conduct of
business for the planning period; it includes the
budgeted income statement and all its supporting
budgets.
Responsibility Budget
It refers to a budget for a responsibility
center.
Rolling / Continuous / Progressive Budget
It refers to a budget which is prepared
throughout the year, that is, as one month elapses,
a budget is prepared for one more month in the
future.
Sales Budget
It refers to a budget that shows the quantity
of each product and the revenue expected to be
sold.
Traditional Budgeting
It refers to a system of budgeting which
concentrates on the incremental change from the
previous year assuming that the previous year’s
activities are essential and must be continued.
Steps in Developing a Master Budget
a. Establish basic goals and long-range plans
for the company.
b. Prepare a sales forecast for the budget
period.
c. Estimate the cost of goods sold and
operating expenses.
d. Determine the effect of budgeted operating
results on assets, liabilities and ownership
equity accounts.
e. Summarize the estimated data in the form
of a projected income statement for the
budget period and the projected statement
of financial position as of the end of the
budget period.
Steps in Preparing a Flexible Budget
a. Determine the relevant range over which
activity is expected to fluctuate during the
coming period.
b. Analyze the costs that will be incurred over
the relevant range in order to determine
cost behavior patterns (variable, fixed or
mixed).
c. Separate the costs by behavior and
determine the formula for variable and
mixed costs.
d. Using the formula for the variable portion of
the costs, prepare a budget showing what
costs will be incurred at various points
throughout the relevant range.
Zero-Based Budgeting
It refers to a system of establishing
financial plans beginning with an assumption of no
activity and justifying each program or activity
level.
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Budget Committee
It is a body that oversees the preparation
and administration of the budget. It is usually
headed by the controller and composed of
representation from the different functional areas
(marketing,
production,
finance
and
administration).
Common Budget Periods
a. Master budget – quarterly or annual basis
b. Capital budget – 5 to 10 years
c. Responsibility budget –monthly basis
d. Cash budget – day-to-day or monthly basis
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