BUDGETING

Budgeting
 The process or act of preparing a financial budget.
 Can be expressed as the strategic plan, and the
corresponding amount involved in materializing the plan.
Budget – refers to a plan which is expressed in a
quantitative monetary value. A final output of the whole
budgeting process.
 It sets the expected specifics as well as the total costs
involved in meeting the ultimate goal of the business.
 Provide clear directions to the business in attaining the
predetermined goals and objectives
 It serves as medium to control the financial activities of
the business.
 Budgeting
Among are Benefits of Budgeting:
1. Planning is facilitated
2. Financial coordination is established
3. Resources are properly allocated
4. Morale of employees is improved
5. Control mechanism is enhanced
Planning time – goals and objectives are set
Plan based on time frame
Strategic Plan – more than five (5) years
Medium-Term Plan – three (3) to five (5) years
Short-Term Plan – One (1) year or less
Units / Persons involved in
Budget Preparation
Short-term budget
 Provides the financial
requirements of all
dept. for one year.
Medium-term budget
-it is prepared one every
three to five years and
reviewed every year for
adjustment
Long-Term budget
 Financial expression of
the vision-mission for
next 5 to 10 years.
 Types of Budget or Budgeting
Fixed budget
 A budget prepared based only on one level of production capacity. For ex. The normal
capacity of the business is to produce and sell 50,000 units of a certain product during the
year.
Flexible budget
 A budget prepared showing the projected cost at different levels of production capacity;
for example, a budgetary cost at 20,000 units, 30,000 units, 40,000 units, and 50,000
units.
Continuous or rolling budget
 A one year budget continuously prepared every month by adding another month once the
month has passed.For example ,a 12-month budget has been prepared for the period
January 2018 has elapsed ,the January 2019 budget is added thereby coming up with a
12- month budget again.
Cash budget
 A budget that reflects the expected cash receipts from cash sales,collection of accounts
and note receivable , sale of other assets proceedsof borrowings,and the expected cash
disbursement on payments of opening expenses, interest,taxes ,and loans. The cash
budget should reflect the project cash balance at the end of every period covered.
 Types of Budget or Budgeting
Sales Budget
- A budget that reflects the expected number of units to be sold based on forecast
made from the performance of previous years and other marketing variables.
Production budget
 A budget that shows the cost of producing the product. The cost of production
includes direct materials, direct labor, and factory overhead.
Operating budget (Sales + Production)
 A budget that reflects the sales and production budgets
Financial budget
 A budget that usually includes the cash budget and budgeted balance sheet.
Capital budget
 A long-range budget that incorporates the major expenditures for plant and
machineries.
Master budget
 The overall budget of the business.
 Procedures in Budgeting
Steps in preparing the master budget
1. Prepare the sales budget
The preparation of the projected sales, which is the first step in the budget preparation, is part of the
operating budget.
The data of projected sales units are usually provided by the marketing department based on the trend
of previous years and adjusted accordingly based on the information gathered from the market.
2. Prepare the production budget
The second step in the budgetary process is preparation of the production budget. The number of units
to be produced shall be based on the number of units to be sold and adjusted by the presence of
beginning inventory and expected inventory level at the end of the year. This step includes the
determination of the following:
a. Direct materials requirements
b. Direct labor cost
c. Cost of factory overhead
d. Cost of sales preparation
3. Prepare the projected operating expenses and financing charges. At this point, the expected
administrative and marketing expenses including the estimated financing charges from borrowing and
the expected amounts of income tax are determined.
4. Prepare the financial budget and capital budget.
The preparation of the financial and capital budget follows these steps:
 Procedures in Budgeting
Steps in preparing the master budget
4. Prepare the financial budget and capital budget.
The preparation of the financial and capital budget follows these steps:
a. Identification of major capital expenditures
b. Projection of the cash inflows or cash outflows
c. Preparation of cash budget
d. Preparation of budgeted balance sheet
The expected expenditures on plants and machinery are identified. This is followed by
the determination of the expected cash inflows and cash outflows.
5. Prepare the projected statement of comprehensive income and projected balance
sheet.
All the data on figures on the operating budget are summarized for the preparation of
the projected statement of comprehensive income. The information on financial and
capital budget will be used to prepare the projected statement of financial position.