FUNCTIONAL AND ACTIVITY-BASED BUDGETING

Time Duration and Allotment: Week 1; 6 hours

Abstract:
This study of functional and activity-based budgeting focuses on the scope of budgeting, its advantages and limitations, and other terminologies used in the budgeting process.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Describe budgeting and the budgetary process;
 Cite the advantages and limitations of budgeting;
 Differentiate the different types of budget; and
 Construct and evaluate data on the master budget.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. FOR MODULAR STUDENTS ONLY: Answer the four (4) exercises presented after the topic content below. (EXCERCISES)

TOPIC CONTENT

Budget – is a management plan, expressed in quantitative terms, used for both planning and control of operations for a given period of time. The budget is a plan or standard at the start
of the period; at the end of the period, it serves as a control device to help management measure its performance against the plan so that future performance may be improved. The term
“budgeting” is used to denote the process of coming up with budgets.

Advantages and Limitations of Budgeting

Uses/Advantages of Budgeting
 It compels periodic planning.
 It provides a means of allocating resources efficiently and effectively.
 It enhances cooperation, coordination, communication and motivation.
 It provides network for performance evaluation.
 It satisfies some legal and contractual requirements.
 It directs the activities toward the achievement of organizational goals.
Limitations of Budgeting
* Considerable time and costs are required.
* Budgets are merely estimates, employing certain amount of judgment,
requiring certain modification or revision if necessary.
* To be successful, a budgetary system requires cooperation of all members
of the organization.
* Budgets often restrict decision-making process.
* The budget program is merely a guide, not a substitute for good management
 ability.

 The most serious consequences occur when the budget is the sole or overriding criterion of performance. To alleviate the problems of employing budgets to evaluate performance,
the following should be considered.
1. Flexibility which means that the budget is viewed as a plan, not set in concrete.
2. Focus on controllable costs.
3. Non-punitive approach. The focus of analysis should not be solely on unfavorable variances as a punitive device to make sure that managers do not go over budget.

 Budgets vis-à-vis Standards

BUDGETS STANDARDS
PURPOSE Budgets are statements of expected costs. Standards pertain to what costs should be if a certain desirable performance is
attained.
EMPHASIS Budgets emphasize cost levels that should not be exceeded. Standards emphasize the level to which costs should be reduced.
COVERAGE Budgets are set for all departments in the firm. (e.g., sales, Standards are set only for the manufacturing division of the firm.
administration, manufacturing)
ANALYSIS When actual data differ from budget, it may be an indication When actual costs differ from standards, the nature and cause of the significant
of either good or bad performance. variance are investigated so that necessary corrective actions are taken
accordingly.

Master Budget – is a comprehensive budget that consolidates the overall plan of the organization within a budget period. It consists of all the individual budgets for each of the segments
of the organization aggregated or consolidated into one overall budget for the entire firm. (other terms: pro forma budget, planning budget, forecast budget, master profit plan)

MASTER BUDGET
OPERATING BUDGET
Sales budget
Production budget
Direct materials budget
Direct labor budget
Factory overhead budget
Inventory budget
Budgeted cost of goods sold
Budgeted operating expense
Budgeted operating income
Budgeted net income
Budgeted income statement
Budgeting-Related Terminologies
Fixed Budget – a budget prepared for a one level of activity within a
certain period (other term: static budget)
Flexible Budget – a budget prepared for different levels of activity
FINANCIAL BUDGET scale budget)
Cash budget Continuous Budget – a 12-month budget that rolls forward one month as the
Budgeted balance sheet current month is completed (other term: perpetual budget)
Budgeted cash flow statement Zero-Based Budgeting – a method of budgeting in which managers are required
Capital expenditure budget to justify all costs as if the programs involved were being proposed for the
Working capital budget first time.
Imposed Budgeting – a process wherein budgets are prepared by top
APPROPRATION-TYPE BUDGET management with little or no inputs from operating personnel.
Advertising budget Participatory Budgeting – a process wherein budgets are developed through
Research and development budget joint decisions by top management and operating personnel.
Joint venture budget Budget Committee – a group of key management persons responsible for
over-all policy matters relating to the budget program and for coordinating
 the budget preparation.
Budget Manual – This describes how a budget is prepared and includes a
planning calendar and distribution instructions for all budget schedules.

 Steps in Developing a Master Budget

1. Establish basic goals and long-range plans for the company. These will serve as guidelines in the preparation of budget estimates.
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of goods sold and operating expenses.
4. Determine the effect of budgeted operating results on assets, liabilities and ownership equity accounts. The cash budget is the largest part of this step, since changes in
many assets and liabilities will depend upon the cash flow forecast.
5. Summarize the estimated data in the form of projected income statement for the budget period and the projected statement of financial position as of the end of the budget
period.

EXERCISES: BUDGETING

Exercise 1. Exercise 3.
Alfred Co. budgets sales at P200,000 and expects a profit after interest but The sales manager of Frank Merchandising has budgeted the following sales
before tax of 10% of the sales. Expenses are estimated as follows: selling = for the 3rd quarter of 2021:
15% of sales; administrative = 9% of sales; finance = 1% of sales. Labor is
expected to be 40% of the total manufacturing costs. Factory overhead is to July 1,235,000
be applied at 75% of direct labor costs. Inventories are to be as follows: August 1,560,000
September 2,080,000
January 1 December 31
Materials 25,000 30,000 Other budgeted estimates are:
Work-in-process 20,000 32,000  All merchandise are to sell at its invoice cost plus 30% mark-up.
Finished goods 35,000 40,000  Beginning inventories of each month are budgeted at 40% of that
particular month’s projected cost of goods sold.
Required:
Required:
1. Cost of goods sold
1. Projected merchandise purchases for the month of July.
2. Total manufacturing cost
2. Projected merchandise purchases for the month of August.
3. Factory overhead

4. Materials purchases
Exercise 2. Exercise 4.
Past collections experienced by Archie Co. proved that 60% of the net sales
The following information is available from Elizabeth Corp.’s accounting
billed in a month are collected during the month sales, 30% are collected in
records for the year ended December 31, 2021. These data would be used as
the following month, and 10% are collected in the second following month. the basis for the next year’s cash budget according to sources and uses of
A record of monthly net sales of previous months is as follows: funds.
 Customer sales receipts for P870,000.
November 450,000 March 500,000  Purchased machinery and equipment for P125,000 cash.
2020
December 460,000 April 550,000  Settled income taxes of P110,000.
2021
January 480,000 May 600,000  Sold investment securities for P500,000.
2021
February 420,000 June 700,000  Paid dividends of P600,000.
 Received rentals of P105,000.
On January 1, 2008, the net accounts receivable balanced showed P229,000.  Issued 500 shares of common stock (ordinary shares) for P250,000.
 Paid a sum of P100,000 due to suppliers and payroll to employees.
Required: Determine the following:  Purchased real estate for P550,000 cash that was borrowed from a
bank.
 Cash collections on accounts receivable during:  Paid P450,000 toward a bank loan.
1. January 2021 Required: Determine the following:
2. March 2021 1. Net cash flow provided by operations for 2021.
3. May 2021 2. Net cash used in investing activities for 2021.
 Accounts receivable balance at the end of: 3. Net cash used in financing activities for 2021.
4. February 2021 4. Net cash increase or decrease for 2021.
5. April 2021

6. June 2021
 Activities, Resources, and Assessment
Online Modular (Learning Materials and Assessment Portals thru SCHOOLOGY)

Resources: Resources:
Schoology App/Messenger Schoology App/Messenger
Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita
Balatbat Cabrera. Balatbat Cabrera.

Activities: Activities:
Read the reference textbook for the comprehensive details of the chapter topic Read the reference textbook for the comprehensive details of the chapter topic
coverage. coverage.

Topic discussion will be through GoogleMeet App. Answer the Exercises given above. The answer/solutions are to be written on a
clean sheet of paper and should be compiled in a plastic envelope. This will be
due for submission on the date set by the teacher.

Assessment: Assessment:
Topic quiz will be publish at Schoology App. Instructions as to the time allocated Topic quiz will be publish at Schoology App. Instructions as to the time allocated
for answering and deadline for submission of quiz will be announced via for answering and deadline for submission of quiz will be announced via
Messenger Group Chat. Messenger Group Chat.