FILAMER CHRISTIAN UNIVERSITY

Graduate School
DEREGULATED STATUS – CHED
Roxas Avenue, Roxas City 5800
Tel. No. (036) 6212-317 Fax No. (036) 6213-075

MBA 405 – Managerial Accounting

APRIL JANE R. BAUTISTA Prof. Violeta A. Barredo

MBA Student Course Facilitator

TOPIC 4: Budgeting

OBJECTIVES

• Understand and define Budgeting.

• Analyze how Budget is important in a business.
• Understand why organizations budget and the processes they use to create
budgets.

INTRODUCTION
Budgeting is creating a plan to spend your money. Good budgeting is spending less than
you are earning as you plan for your financial goals. Budgeting is the fundamental step
in achieving financial literacy, and by extension, reaching financial security and
freedom. Budgeting is the process of creating a plan to spend and invest your hard-
earned money wisely to meet your personal and financial goals in life. It should not be
a mathematical exercise that we think we must endure; rather, it is the result of self-
assessment of our relationship with money and a necessary road map to steer us toward
a higher standard and quality of living.
Budgeting is balancing your expenses with your income now and for the rest of your life.
Budgeting is a process of looking at a business’ estimated incomes (the money that comes
into the business from selling products and services) and expenditures (the money that
goes out form paying expenses and bills) over a specific period in the future. It allows a
business to see if they will be able to continue operating at their expected level with these
projected incomes and expenditures.

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A budget is often drawn up for a financial year and contains information about anticipated
sales and associated business costs within that period. By using this budget, a business
can see how well they are expecting to perform within the year and actual performance
can be monitored against this original proposed plan.

TOPIC PRESENTATION

A budget is a detailed plan for the future that is usually expressed in formal quantitative
terms. Individuals sometimes create household budgets that balance their income and
expenditures for food, clothing, housing, and so on while providing for some savings.
Once the budget is established, actual spending is compared to the budget to make sure
the plan is being followed. Companies use budgets in a similar way, although the amount
of work and underlying details far exceed a personal budget.
Budgets are used for two distinct purposes— planning and control. Planning involves
developing goals and preparing various budgets to achieve those goals. Control involves
gathering feedback to ensure that the plan is being properly executed or modified as
circumstances change. To be effective, a good budgeting system must provide for both
planning and control. Good planning without effective control is a waste of time and effort.
Advantages of Budgeting
Organizations realize many benefits from budgeting, including:
1. Budgets communicate management’s plans throughout the organization.
2. Budgets force managers to think about and plan for the future. In the absence of the
necessity to prepare a budget, many managers would spend all of their time dealing with
day-to-day emergencies.
3. The budgeting process provides a means of allocating resources to those parts of the
organization where they can be used most effectively.
4. The budgeting process can uncover potential bottlenecks before they occur.
5. Budgets coordinate the activities of the entire organization by integrating the plans of
its various parts. Budgeting helps to ensure that everyone in the organization is pulling
in the same direction.
6. Budgets define goals and objectives that can serve as benchmarks for evaluating
subsequent performance.

The master budget consists of a number of separate but interdependent budgets that
formally lay out the company’s sales, production, and financial goals. The master budget

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culminates in a cash budget, a budgeted income statement, and a budgeted balance
sheet. Exhibit 8–1 provides an overview of the various parts of the master budget and
how they are related.

Budgeting Includes:
1. The Cash Budget
The cash budget is composed of four major sections:
1. The receipts section.
2. The disbursements section.
3. The cash excess or deficiency section.
4. The financing section.
2. The Sales Budget
Schedule 1 contains Hampton Freeze’s sales budget for 2014. As you study this schedule,
keep in mind that all of its numbers are derived from cell references to the Budgeting.

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3.The Production Budget
The production budget is prepared after the sales budget. The production budget lists
the number of units that must be produced to satisfy sales needs and to provide for the
desired ending finished goods inventory.
4.The Direct Materials Budget
The direct materials budget details the raw materials that must be purchased to fulfill the
production budget and to provide for adequate inventories.
5.The Direct Labor Budget
By knowing in advance how much labor time will be needed throughout the budget year,
the company can develop plans to adjust the labor force as the situation requires.
6.The Selling and Administrative Expense Budget
In large organizations, this budget would be a compilation of many smaller, individual
budgets submitted by department heads and other persons responsible for selling and
administrative expenses. For example, the marketing manager would submit a budget
detailing the advertising expenses for each
budget period.
7.The Ending Finished Goods Inventory Budget
Summary:
The process shows how the various operating budgets relate to each other. The sales
budget is the foundation for a master budget. Once the sales budget has been set, the
production budget and the selling and administrative expense budget can be prepared
because they depend on how many units are to be sold. The production budget
determines how many units are to be produced, so after it is prepared, the various
manufacturing cost budgets can be prepared. All of these budgets feed into the cash
budget and the budgeted income statement and balance sheet. The parts of the master
budget are connected in many ways. For example, the schedule of expected cash
collections, which is completed in connection with the sales budget, provides data for
both the cash budget and the budgeted balance sheet.

Thank you.
“A budget is telling your money where to go instead of wondering where it
went”-Dave Ramsy