MAC 302 – MANAGEMENT REPORTING
2nd Semester, AY 2024 – 2025
BS Management Accounting
Module 5
BUDGETING
BUDGET- a plan expressed in quantitative terms, on how to acquire and use the resources of an entity during
a budget period a certain future period of time. To be most effective, the firm’s budget should be an integral part
of the strategic plan. It must reflect management’s objectives and plans. A master budget summarizes the
results of all of the firm’s individual budgets into a set of projected financial statements and schedules.
Specifically, the master budget summarizes the results of the following two major budgets:
1. The operating budget — The budgeted income statement and supporting schedules.
2. The financial budget — The capital budget, cash budget, and the budgeted balance sheet, and statement of cash
flows.
USES/ ADVANTAGES OF BUDGETING
1. It compels periodic planning.
• Strategic Budgeting- a form of long-range planning based on identifying and specifying organizational goals and
objectives
2. It enhances cooperation, coordination, and communication.
3. It forces quantification of plans and proposals.
4. It provides a framework for performance evaluation.
5. It enables members of the organization to be aware of business costs.
6. It satisfies some legal and contractual requirements.
7. It directs the activities toward the achievement of organizational goals.
LIMITATIONS OF BUDGETING
1. Since budgeting means planning for the future, the plan itself, as well as the figures therein, are
merely estimates, requiring a certain amount of judgement
2. To be successful, a budgetary system requires the cooperation and participation of all members of the
organization.
3. Some managers think that budget restricts their investments and limits their decision-making power,
making it difficult to sell the idea of budgeting to some people in the organization.
4. The development and installation of a good budgetary system may be time-consuming and too costly for some
organizations, such that the benefits that can be derived from budgeting may be outweighed by its costs.
Budgets are prepared for some set period of time, usually one year. However, some budgets must be broken
down into shorter time frames. For example, a cash budget is usually prepared monthly to allow management to
Reference: Management Services (2021 Edition )by: Franklin T. Agamata
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MAC 302 – MANAGEMENT REPORTING
2nd Semester, AY 2024 – 2025
BS Management Accounting
plan for the firm’s cash needs. Many firms use rolling budgets which are continually updated as time passes. As an
example, a 12-month rolling budget adds a future month and drops the current month as it ends.
Budgets may be constructed in a number of ways:
a. Top-down mandated approach — Upper-level management establishes the budget parameters and it is passed
down through the organization to each operating unit.
(1) Advantages include quick preparation time and clear communication of management’s objectives.
(2) Disadvantage is that lower-level management and employees may view it to be dictatorial and not fully
embrace and accept the budget.
b. Participative (bottom-up) is driven by involving lower- level management and employees.
(1) Advantages are that employees may more readily accept the budget, morale may be improved, and budget
input is provided by a larger number of individuals.
(2) Disadvantages are that the process is time- consuming, and managers may try to pad their budgets.
c. Many budgets are prepared using a blended approach that combines aspects of the top-down and bottom-up
methods.
A budget displays a plan of action for future operations. The most important functions of a budget are to
coordinate the various functional activities of the firm and to provide a basis for control of the activities. Budgets may be
prepared for all elements of the value chain, which includes research and development, design, production, marketing,
distribution, customer service, and administration. The budgets process begins with an estimate of sales and then
proceeds systematically as outlined below:
a. Develop a sales forecast.
b. Develop a production schedule to calculate production costs and costs of goods sold.
c. Estimate other expenses and revenues.
d. Complete the pro forma financial statements and budgets.
THE BUDGET COMMITTEE- usually composed of the sales manager, production manager, chief engineer,
treasurer, and controller.
THE BUDGET COMMITTEE’S PRINCIPAL FUNCTIONS:
1. Formulate and decide on general policies relating to the firm’s budgetary system.
2. Request, review, and revise (if necessary) individual budget estimates from the different segments of the
organization.
3. Approve budgets and subsequent revisions therein.
4. Receive, evaluate, and analyze budget reports.
5. Recommend necessary actions to improve operational efficiency and effectiveness.
Master Budget- represents the overall plan of the organization for a given budget period. It consists of all the
individual budgets for each of the segment of the organization aggregated or consolidated into one overall budget
for the entire firm.
• Budget Report- compares actual performance with budgeted performance.
• Continuous (Rolling) Budget- 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 the current month or quarter ends.
• Fixed (Static) Budget- based on only one level of activity or production
• Flexible (Variable, Dynamic) Budget- a series of budgets prepared for many levels of activity.
• Zero-base Budgeting (ZBB) - a budget and planning process in which each manager must justify a
department’s entire budget from a base of zero every period; all expenditures must be justified regardless of the
variance form the previous periods; the objective is to encourage periodic re-examination of all costs in the hope that
some can be reduced or eliminated.
• Life-cycle Budget- estimates a product’s revenues and expenses over its entire life cycle beginning with research
and development, proceeding through the introduction and growth stages, into the maturity stage, and finally, into
the harvest or decline stage.
VALUE CHAIN: R & D- design – production – marketing – customer service.
• Activity-based Budgeting- applies activity-based costing principles to budgeting
Reference: Management Services (2021 Edition )by: Franklin T. Agamata
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MAC 302 – MANAGEMENT REPORTING
2nd Semester, AY 2024 – 2025
BS Management Accounting
• Kaizen Budgeting- assumes the continuous improvement of products and processes, usually by way of many small
innovations rather than major changes; it incorporates expectations for continuous improvement into budgetary
estimates.
EXERCISES:
1. Bugnot Corporation budget includes the following data:
Budgeted Sales 7,200
Inventories Beginning Ending
Finished Goods 300 400
Work in Process in
equivalent units 60 160
How many equivalent units should Bugnot Corporation plan to produce during the period?
2. Gerdie Company has the following information:
Month Budgeted Sales
March $50,000
April 53,000
May 51,000
June 54,500
July 52,500
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.
Required: Prepare a purchases budget for April through June.
Reference: Management Services (2021 Edition )by: Franklin T. Agamata
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