MS 8910_COMPREHENSIVE BUDGETING BATCH MAY 2021

MS 8910 – COMPREHENSIVE BUDGETING

TOPIC OUTLINE
Definition of Terms

Advantages and Limitations of

Budgeting
Basic Concepts
Approaches in Budgeting
The Budgeting
Process
Budgets vs. Standards
COMPREHENSIVE Types of Budget
BUDGETING

Methodologies Operating Budget

The Master
Budget Financial Budget

Capital Budget

LECTURE NOTES
BASIC CONCEPTS
BUDGET - a realistic plan, expressed in quantitative terms, for a certain
future period of time.
BUDGET SLACK - also known as padding or shaving to be able to manipulate
budgets to favor certain departments by (1) OVERSTATING
EXPENSES and (2) UNDERSTATING REVENUES
FINANCING GAP - occurs when required assets exceeded available funds.
Advantages and Limitations of Budgeting
ADVANTAGES
(1) Management motivation
(2) Basis for evaluation
(3) Serves as communications of plans and goals throughout the organization.
(4) Intelligent use and proper allocation of resources and effective prevention of waste
(5) It is a control mechanism
LIMITATIONS
(1) It is NOT an exact science. It is used for approximation and judgments.
(2) The success of budgeting depends on the cooperation and participation of all members of the
organization.
(3) Time consuming.
(4) Excessive emphasis on budgeting may too much motivate managers making the information provided
inaccurate.
(5) It is merely a guide and not a substitute for management.
Approaches in Budgeting
TOP-DOWN APPROACH
- Top management imposes the budget.
BOTTOM-UP
- All levels of management are involved.
NOTE: For better management acceptance bottom-up approach or participative approach must be used.

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MS 8910_COMPREHENSIVE BUDGETING BATCH MAY 2021

Budgets vs. Standards

 Budges are statements of expected costs while standards pertain to what costs should be given a
certain level of performance.
 Budgets emphasize cost levels that should not be exceeded. On the other hand, standards emphasize
the levels to which cost should be reduced.
 Budgets are set for all departments in the firm but standards are set only for the production division
of the firm.
THE BUDGETING PROCESS
STEP 1: Obtain estimates of sales, production and other available resources.
NOTE: The common starting point in estimate is prior performance (i.e. last year sales level)
STEP 2: Communicate the budget to responsible managers.
STEP 3: Implementation
STEP 4: Regular report of progress.
BUDGET COMMITTEE - a group of key management person (usually board of
directors) responsible for overall policy matters relating to the
budget program.
BUDGET MANUAL - describes how a budget is to be prepared. It usually includes
(a) budget calendar and (b) distribution instructions.
BUDGET REPORT - shows a comparison between actual and budget performance.
Functions of Budget Committee:
 Decide the company’s general policies and objectives.
 Receive and review individual budgets sent to them by divisions.
 Suggest changes and modifications.
 Approve budgets for departmental action.
NOTE: The budget committee DO NOT PREPARE and DEVELOP BUDGETS. They only approve it because the
preparation of budgets rests with individual managers.
TYPES OF BUDGET
FIXED / STATIC BUDGET - Designed to remain unchanged irrespective of the
level of activity actually attained.
FLEXIBLE BUDGET - used in standard costing. This type of budget is set
of alternative budgets at different expected levels
of activity.
BUDGETING METHODOLOGIES
CONTINUOUS (ROLLING) BUDGET - a budget that is revised on a regular (continuous) basis. For
example, a budget for 12 months is extended for another
month in accordance with new data as the current month
ends.
INCREMENTAL BUDGETING - a budgeting process wherein the current period's budget is
simply adjusted to allow for changes planned for the coming
period.
ZERO-BASED BUDGETING (ZBB) - a budget is prepared every period from a base of zero. All
expenditures must be justified regardless of variances from
previous periods.
LIFE-CYCLE BUDGET - a product's revenues and expenses are estimated over its
entire life cycle (from research and development to withdrawal
of customer support). This concept is helpful in target costing
and target pricing. It accounts for, and emphasizes the
relationships among the costs at all stages of the value chain,
such as research and development, design, production,
marketing, distribution, and customer service.
ACTIVITY-BASED BUDGETING - unlike in the traditional emphasis on functions or spending
categories, activity-based budgeting applies the ABC principles
and procedures to budgeting. The activities are identified, a
cost pool is established for each activity, a cost driver is
identified for each pool, and the budgeted cost for each pool is
determined by multiplying the budgeted demand for the
activity by the estimated cost per unit of such activity.
KAIZEN BUDGETING - Kaizen is a Japanese term that means continuous
improvement. Thus, Kaizen budgeting assumes the continuous
improvement of products and processes; the effects of
improvement and the costs of their implementation are
estimated. Kaizen budgeting is based not on the existing
system but on changes that are to be made.

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THE MASTER BUDGET

It is a consolidation of financial estimates. It is composed of OPERATING, FINANCIAL and CAPITAL
BUDGETS.
OPERATING BUDGETS

SALES
BUDGET
ENDING INVENTORY
BUDGET
(Finished goods,
Materials, Work-in- PRODUCTION
Process) BUDGET

MATERIALS LABOR COST FACTORY

COST BUDGET OVERHEAD COST

COST OF GOODS
SOLD BUDGET R&D/DESIGN
COSTS
BUDGET
MARKETING
BUDGETED INCOME COSTS BUDGET
STATEMENT
DISTRIBUTION
COSTS BUDGET

CUSTOMER
SERVICE COSTS

ADMINISTRATIVE
COSTS BUDGET

CAPITAL CASH BUDGETED

BUDGET BUDGET BALANCE SHEET

FINANCIAL BUDGETS BUDGETED STATEMENT

OF CASH FLOWS

NOTES FROM THE DIAGRAM:

(a) The first budget to be prepared is SALES BUDGET. Because of that it is known as the ANCHOR
BUDGET. All other budgets are anchored directly or indirectly on the sales budget. The only limiting
factor of the sales budget is the customer demand.
(b) The information on budgeted balance sheet does not contain information for the current budget only
but rather it has cumulative information like a usual balance sheet of a set of financial statements.

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DISCUSSION EXERCISES
STRAIGHT PROBLEMS:
PURCHASES BUDGET – MERCHANDISING COMPANY
1. PIKACHU INC. has the following information:
Month Budgeted Sales
March P50,000
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.
REQUIREMENT: Prepare a purchases budget for April through June.
BUDGETS OF A MANUFACTURING COMPANY
2. MEWTWO INC. has the following budgeted sales for the next six month period:
June 90,000 August 210,000 October 180,000
July 120,000 September 150,000 November 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an
inventory of finished products that equal 20% of the unit sales for the next month.
Five pounds of materials are required for each unit produced. Each pound of material costs P8.
Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory
on June 1 was 15,000 pounds.
Each unit requires 0.50 direct labor hours at a rate of P5 per hour. Overhead is applied on the basis of
P2 per direct labor hour.
REQUIREMENTS:
(a) Prepare production budgets in units for July, August, and September.
(b) Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and dollars for each month.
(c) Compute for the total labor hours and total labor cost for July, August and September.
(d) Prepare the overhead budget.
CASH BUDGET
3. EEVEE CORP. prepared cash estimates for the next four months. The following estimates were
developed for certain items:
Item March April May June
Cash sales P10,000 P6,000 P8,000 P11,000
Credit sales 5,000 2,000 6,000 9,000
Payroll 2,000 1,500 2,500 3,000
Purchases 3,000 2,600 2,800 4,000
Other expenses 2,500 2,400 2,600 2,800
In February, credit sales totaled P9,000, and purchases totaled P5,000. January credit sales were
P12,000. Accounts receivable collections amount to 30% in the month after the sale and 60% in the
second month after the sale; 10% of the receivables are never collected. Payroll and other expenses
are paid in the month incurred. Seventy-five percent of the purchases are paid in the month
incurred, and the remainder are paid in the following month. A P15,000 tax payment is due on June
15. The cash balance was P5,000 on March 1. The company wants a minimum cash balance of
P5,000 per month.
REQUIREMENTS:
(a) Prepare a cash budget for the four-month period, March through June.
(b) List the amount of funds available for investing or required for borrowing in each month.
BUDGETED FINANCIAL STATEMENTS
4. CELEBI CORP. has the following sales forecast for the first four months of 20X9.
January P70,000
February 70,000
March 90,000
April 80,000
CELEBI’s cost of sales is 60% of sales. Fixed costs are P12,000 per month. CELEBI maintains
inventory at 150% of the coming month’s budgeted sales requirements and has P55,000 inventory at
January 1.
CELEBI pays for its purchases 40% in the month of purchase, 60% in the following month. CELEBI
collects 60% of its sales in the month of sale, 40% in the following month. All fix costs require cash
disbursements. CELEBI’s balance sheet at December 31, 20X8 appears below.
Assets Equities
Cash P 20,000 Accounts payable P 18,000
Receivables 30,000
Inventory 55,000 Stockholders’ equity 87,000

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MS 8910_COMPREHENSIVE BUDGETING BATCH MAY 2021

Total P105,000 Total P105,000

REQUIREMENTS:
(a) Prepare a budgeted income statement for the first three months of 20X9, in total, not by month.
(b) Prepare a purchase budget for the first three months of 20X9 b month.
(c) Prepare a cash receipts budget for each of the first three months of 20X9 and for the quarter as
a whole.
(d) Prepare a cash disbursement budget for each of the first three months of 20X9 and for the
quarter as a whole.
(e) Prepare a cash budget for each of the first three months of 20X9 and for the quarter as a whole.
(f) Prepare a pro forma balance sheet as of March 31, 20X9.
MULTIPLE CHOICE (THEORIES):
1. Which of the following organizations is not likely to use budgets?
A. Manufacturing firms. D. Nonprofit organizations.
B. Merchandising firms. E. None of the above, as all are likely to use budget
C. Firms in service industries.
2. Which of the following choices correctly denotes managerial functions that are commonly associated
with budgeting?
Performance Coordination
Planning Evaluation of Activities
A. Yes Yes No
B. Yes Yes Yes
C. Yes No No
D. Yes No Yes
E. No Yes No
3. If a manager builds slack into a budget, how would that manager handle estimates of revenues and
expenses?
Revenues Expenses
A. Underestimate Underestimate
B. Underestimate Overestimate
C. Overestimate Underestimate
D. Overestimate Overestimate
E. Estimate correctly Estimate correctly

4. Wilson Corporation is budgeting its equipment needs on an on-going basis, with a new quarter being
added to the budget as the current quarter is completed. This type of budget is most commonly
known as a:
A. capital budget. D. pro-forma budget.
B. rolling budget. E. financial budget.
C. revised budget.
5. A static budget report
A. shows costs at only 2 or 3 different levels of activity.
B. is appropriate in evaluating a manager's effectiveness in controlling variable costs.
C. should be used when the actual level of activity is materially different from the master budget
activity level.
D. may be appropriate in evaluating a manager's effectiveness in controlling costs when the
behavior of the costs in response to changes in activity is fixed.
6. The budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows
comprise:
A. the final portion of the master budget.
B. the depiction of an organization's overall actual financial results.
C. the first step of the master budget.
D. the portion of the master budget prepared after the sales forecast and before the remainder of
the operational budgets.
E. the second step of the master budget.
7. Evaluate the following statements:
I. The cash budget is known as the anchor budget since cash is the fuel of the company’s
operations.
II. A flexible budget is adjusted to reflect expected costs at the actual level of activity.
III. A budget serves as a control tool for a company since budget reports are prepared to analyze
any difference from the budget. The company does not need to modify future plans since the
operations had already started.
A. B. C. D.
Statement I True True False True
Statement II False True True True

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Statement III True False False True

8. Statement 1: Budget committee suggests changes and modifications on the proposed budget since
they are not the preparer of it.
Statement 2: The bottom-up approach in budget preparation should always be used.
Statement 3: Budgets serves as a control tool not a communication tool.
A. B. C. D.
Statement 1 False False True True
Statement 2 True False False True
Statement 3 True True False False
9. A master budget contains which of the following?
A. B. C. D.
Sales Yes No No Yes
Production Yes No No No
Pro-forma Statements Yes Yes No Yes
10. Zero-based budgeting:
A. involves the review of changes made to an organization’s original budget.
B. does not provide a summary of annual projections.
C. involves the review of each cost component from a cost/benefit perspective.
D. emphasizes the relationship of effort to projected annual revenues.

- END OF HANDOUTS -

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