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Budgeting Process

Budgeting process can range from the fairly informal process undergone by a small firm,
to an elaborately detailed, several-month procedure employed by large firms. Key features of the
process include directing and coordinating the overall budget.

Direct and Coordinating

Every organization must have someone responsible for directing and coordinating the
overall budgeting process.

Budget Director- works under the direction of the budget committee and is usually the
controller of someone who reports to the controller.

Budget Committee- is responsible for reviewing the budget, providing policy guidelines and
budgetary goals, resolving differences that may arise as the budget is prepared, approving the
final budget, and monitoring the actual performance of the organization as the year unfolds.

Types of Budget
Master Budget- is a comprehensive financial plan for the year made up of various individual
department and activity budgets. A master budget can be divided into operating and financial

Operating Budget concern with the income-generating activities of the firm: sales,
production, and finished goods inventories. The ultimate outcome of the operating budget
is a pro forma or budget income statement.
Financial Budget- concern with the inflows and outflows of cash and with financial

Master budget is usually prepared for a one-year period corresponding to the companys
fiscal year. The yearly budgets are broken down into quarterly and monthly budgets. Using
shorter time periods helps managers to compare actual data with budgeted data as the year

Continuous or Rolling budget-

moving 12-month budget

as a month expires in the budget, an additional month in the future is added
forces managers to plan ahead constantly
objective: update master budget each month as


Forecasting Sales Forecasting other variables
Sales forecast is the basis for sales Cost and cash related items
budget, the basis for all operating
The responsibility of the marketing Historical amounts can be real value
The formal approaches: time series The cash budget is critically important
analysis, correlation analysis, economic part of master budget
modelling, industrial analysis

Preparing the Operating Budget

Sales budget - approved by the budget committee that describes expected sales for each
products in units or pesos.

Production budget- describes how many units must be produced in order to meet sales
needs and satisfy ending inventory requirements.

Direct material purchases budget- based on the amount of materials needed for
production and the inventories of direct materials. Expected direct materials usage is
determined by the input-output relationship which is determined by the Engineering

Direct Labor Budget- shows the total direct labor hours and direct labor cost needed for
the number of units in the production budget. Usage of direct labor is determined by
technological relationship between labor and output.

Overhead budget- shows the expected cost of all indirect manufacturing items.

Ending finished goods inventory budget- supplies information needed for the balance
sheet and also serves as an important input for the preparation of the cost of goods sold
Cost of goods sold budget- this budget will be used in preparing the budgeted income
Marketing Expense Budget- outlines planned expenditures for selling and distribution
activities. As with overhead, marketing expenses are broken into fixed and variable
components. Salaries, depreciation on office equipment, advertising and fixed expenses.

Research and Development Expense Budget- contains planned expenditures for a

separated department devoted to a new product research and development

Administrative Expense Budget- consists of estimated expenditures for the overall

organization and operation of the company. Fixed with respect sales and includes
salaries, depreciation, legal and auditing fees.

Budgeted Income Statement- upon completion of the administrative expense budget, all
the operating budget has been completed and is used to prepare the budgeted income