BUDGETING
Operating and Financial Budgeting
Uses/ Advantages Limitations
☛Budgets: Defined
➢ Budgets are realistic plans expressed in monetary terms for a certain 1. Budgets can be used by top management 1. Figures are merely estimates
future period of time. Once established, they served as goals and to communicate its plans and goals requiring a certain amount of
guidelines to be adhered to, and to be respected. That is, actions must be throughout the organization judgment.
in the conformity with the terms of the plans.
2. It enhances coordination, cooperation 2. To be successful, a budgetary
and communication system requires the cooperation and
☛Why is budgeting important?
participation of all members of the
● Standard-setting. Standards are established as a basis of actions and 3. It forces management to think about and
organization.
performance, also a motivator. plan for the future.
● Planning. Concrete plans, targets, and activities are developed. 3. Some managers think that budget
● Communication and coordination. Goals and processes should be 4. It provides a framework for performance
restricts their investments and limits
effectively communicated and coordinated to encourage participation, evaluation.
their decision-making power, making
involvement, commitment and ownership of the organizational plans. 5. Through budgeting, resources are more it difficult to sell the idea of
● Monitoring of activities. Actions are checked to assess conformity with appropriately allocated. budgeting to some people in the
plans organization.
6. It directs the activities toward the
And to make on-line corrections and adjustments. achievement of organizational goals. 4. The development and installation
● Evaluation of results (e.g., feedback, performance measurement, variance of a good budgetary system may be
analysis). Results are to be evaluated to determine what happened and time-consuming and too costly for
make end-of-line corrections and adjustments. some organizations, such that the
benefits that can be derived may be
☛Budget Committee outweighed by its costs.
➢ Also called as management committee or executive committee, is
primarily responsible in developing and institutionalizing budgetary
☛Master Budget
systems and processes. The budget committee consists of key functional ➢ Represents the overall plan of the organization for a given budget period.
and process executives such as the finance manager, production manager, ➢ Consist of all the individual budgets for each of the segment of the
human resource manager, purchasing manager, quality control manager, organization aggregated or consolidated into one overall budget for the
information resource manager, design and engineering manager and entire firm.
logistics manager, and others. ➢ It is composed of the operating budget and financial budget.
MASTER BUDGET
Operating Budgets Financial Budgets
*Sales Budget *Balance Sheet Budget
*Inventory Budget *Statement of cash
flows budget
*Production Budget
*Statement of changes
*Material Purchase
in owner’s equity ☛Incremental Budgeting
Budget
budget
*Direct Labor Budget
*Schedules of ➢ A budgeting process wherein the current period’s budget is simply
receivables, payables, adjusted to allow for changes planned for the coming period.
*Factory Overhead
Budget accruals, and deferrals
*Selling and
administrative Budget
*Income statement
☛Budget Repot
➢ compares actual performance with budgeted performance
Budgeting Models
☛Continuous (rolling) budgeting.
➢ One that is revised on a regular (continuous) basis; typically, the budget is
extended for another month or quarter in accordance with new data as ☛Imposed Budgeting
the current month or quarter ends.
➢ Budgets are prepared by top management with little or no inputs from
☛Flexible (Variable, Dynamic) Budgeting
operating personnel. A major problem with imposed budgets is that if
➢ A series of budgets prepared for many levels of activity. It makes possible
unrealistic, they are not useful for planning, which one of a budget’s
adjustment of the budget to the actual level of activity before comparing
primary purpose is.
the budget figures with the actual results.
☛Participatory Budgeting
☛Static Budgeting
➢ Budgets are developed through joint decision by top management and
➢ A budget based on only one level of activity.
operating personnel.
☛Program Budgeting
➢ An approach that relates resource inputs to service outputs; it generally
starts by defining the objectives by output results rather than in terms of
quantity of input activities. This requires that a budget indicate not only
how the
requested COMPUTATIONAL FORMATS
funds are to
BUDGETED PRODUCTION BUDGETED MATERIALS PURCHASES
be spent but
also why the Budgeted Sales XX Budgeted production XX
funds are to
Add: desired ending finished goods inventory XX X Quantity of materials required per unit of product XX
be spent in
those ways. Total: XX Total materials to be used XX
☛Zero-based
Budgeting (ZBB) Less: expected beginning finished goods inventory XX Add: desired ending materials inventory XX
➢ A budget is Budgeted production XX Total: XX
prepared
every period Less: expected beginning materials inventory XX
from a base
Budgeted materials purchases XX
of zero. All
expenditures BUDGETED MERCHANDISE PURCHASES CASH BUDGET
must be
Budgeted Sales XX Cash balance, beginning XX
justified
regardless of Add: desired ending merchandise inventory XX Add: receipts XX
variances
from Total: XX Total cash available before current financing XX
previous Less: expected beginning merchandise inventory XX Less: disbursements XX
periods. Excess(deficiency) of cash available over disbursement XX
☛Life-cycle Budgeted merchandise purchases XX
Budgeting Financing XX
➢ estimates a
Cash balance, ending XX
product’s
revenues incorporates expectations for continuous improvement into budgetary
and expenses over its entire life cycle beginning with research and estimates.
development, proceeding through the introduction and growth stages, into ☛Governmental Budget
the maturity stage, and finally, into the harvest or decline stage. This ➢ Unlike in a private sector budget, a governmental budget is not only a
concept is helpful in target costing and target pricing. financial plan and a basis for performance evaluation but also an
☛Activity-based Budgeting expression of public policy and a form of control having the force of law.
➢ applies activity-based costing principles to budgeting
☛Kaizen Budgeting
➢ Kaizen is a Japanese term that means continuous improvement. Hence, it
assumes the continuous improvement of products and processes, usually
by way of many small innovations rather than major changes; it
