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NOTES IN BUDGETING
What is a budget?

 A plan, expressed in quantitative terms, on how to acquire and use the resources of an
entity during a certain period of time.
o Budget period refers to any future period of time during which the budget is
effective.
Distinguish between profit planning and budgeting.

Profit planning Budgeting

In a broader perspective, is a well thought- A plan expressed in quantitative terms that
out operational plan which involves may be considered as a tool of profit
setting goals or objectives, as well as the planning when profit planning is construed
methods or programs by which such goals as a broader term.
are to be achieved. It encompasses the
following:
a) Sales planning programs;
b) Programs for control of all
manufacturing and
nonmanufacturing costs;
c) Programs affecting working
capital and plant investment; and
d) A review of all factors affecting
the return on investment.

Enumerate and describe the three commonly used procedures in profit planning.
1) Priori method – The profit objective comes first before the entire planning process.
2) Posteriori method – The profit objective results from the entire planning process.
3) Pragmatic method – Management uses an acceptable profit standard that is based on the
company’s own business experience.
Enumerate and briefly describe some uses/advantages of budgeting.
1) Budgeting compels periodic planning.
- Efficient and effective utilization are the results of forcing the members of the
organization to plan on how to acquire and use the firm’s scarce resources.
2) Budgeting enhances coordination, cooperation and communication.
- It enables different organizational segments to exchange their ideas and objectives,
giving them the opportunity to communicate, coordinate their activities, and cooperate
with each other.
3) Budgeting forces quantification of plans and proposals.
- It compels people to express their plans in terms of pesos and other units of measure to
make them more meaningful and much easier to evaluate.
4) Budgeting provides a framework for performance evaluation.
- Actual results of operations are compared with the budgeted figures to monitor the
organization’s or the organizational segment’s performance and provide feedback
information that is important in developing budgets for the succeeding budget period.
5) Budgeting enables members of the organization to be aware of business costs.
- Managers who are given participation in developing the budget become aware of the
possible cost consequences of their planned activities, thus it allows them to conduct a
cost-benefit analysis of their proposals.
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6) Budgeting satisfies some legal and contractual requirements.

- Some legal and contractual requirements compel the firm to submit budgets for its
approval; it is employed out of necessity, not because of the advantages that may
derived from it.
7) Budgeting directs the firm’s activities toward the achievement of organizational
goals.
- During the process, specific operational goals for each segment and the goals of the
organization as a whole is incorporated in the budgets.
What are the two most important functions of budgeting?
1) Planning – Greatest contribution of budgeting to management and provides the basis for
the second major function of budgeting, control.
2) Control – The comparison of actual results of operations with the budgeted figures with
the objective not merely minimizing the costs but also to monitor activities and take the
necessary corrective actions when variances between actual results and planned figures are
noted.
Enumerate some budgeting limitations.
1) Budgeting are merely estimates requiring a certain amount of judgment.
2) A budgetary system requires the cooperation and participation of all the members of the
organization for it to be successful.
3) Some managers think that budgets restrict their movements and limit their decision making
power.
4) The development and installation of a good budgetary system may be time consuming and
too costly for some organizations.
Are budgets the same as standards? Explain.
They have similarities however are not actually the same.

DIFFERENCES Budgets Standards

Purpose Are statements of expected
costs
Emphasis Emphasize cost levels that
should not be exceeded
Completeness Are customarily set for all
departments in the firm
Analysis and Breakdown When actual costs differ
from the budget, it may be
an indication of either good
or bad performance
Pertain to what costs ‘might
be’ if certain highly
desirable performance are
attained
Emphasize the levels to
which costs should be
reduced
Are usually set only for the
manufacturing divisions of
the firm
When actual costs differ
from standards, the nature
and cause of the difference
or variance is investigated
so that necessary corrective
actions are taken in time

SIMILARITIES
Both attempt to predetermine expenses
Both consider departmental expenses according to accounts
Both assume that costs are controllable along direct lines of supervision and responsibility
Both require the issuance of periodic comparative costs reports wherein actual results are
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compared with the budgeted or standard figures

Who usually compose a budget committee?

It is usually composed of the sales manager, the production manager, the chief engineer, the
treasurer, and the controller.
Enumerate and briefly discuss the fundamental budgeting principles that must be considered in
budget development and implementation.
1) Budget Development
a. Adequate and clearly defined guidance should be provided to all responsible
persons in the organization so that they may work on the same assumptions,
agenda and objectives.
b. All individuals concerned should be encouraged to participate and cooperate in
the budgeting process.
c. Eliminate the feeling of anxiety and defensiveness among the participants in the
course of preparing the budget.
d. Budget development should be structured such that there is a reasonably great
chance of attaining the objectives.
2) Budget Implementation
a. Reward systems must be established to motivate all persons concerned to work
toward the attainment of goals.
b. In implementing the budget, giving rewards for good performance, rather than
punishment for bad results should be emphasized.
c. A performance reporting system should be provided to get immediate feedback on
the result of operation of each individual or organizational segment concerned.