Budget is a detailed and realistic plan, expressed in quantitative terms, outlining the
acquisition and utilization of financial resources for a certain future period of time. Simply
stated, budgets represent the financial plan of a certain company the future expressed in
formal quantitative terms.
Budgetary control involves the use of budgets to control the actual activities.
Budget slack also known as budget padding or budget shaving, is an intentional
manipulation of budget estimations to favor certain departments. This can be done by
either overstating expenses or understating revenues.
Budget Manual is a document that describes how a budget is to be prepared.
Budget planning calendar which is a schedule of activities that must be completed in
order to create and develop a budget.
Advantages of Budgeting
• A budget is a planning and communication tool.
• A budget helps in directing and organizing resources.
• A budget serves as a control mechanism.
• Budgets are used for performance evaluation.
• Budgets are used for management and employee motivation.
• Intelligent use of budgets results to proper allocation of resources and effective
prevention of waste.
Disadvantages of Budgeting
• Budgeting is NOT an exact science.
• Budgeting is time consuming.
• The success of budgeting depends on the cooperation and participation of all
members of the organization.
• Budgets are applied mechanically and rigidly.
• Excessive emphasis on budgeting may too much motivate managers making the
information provided inaccurate.
• Budgeting is primarily concerned with financial outcomes.
Approaches in Budgeting
TOP-DOWN APPROACH is an approach in budgeting where the top management,
including executives, prepares the budgets then “pushes down” the budget to different
department heads upon approval. Top-down approach is also known as imposed
budgeting or authoritarian budgeting.
BOTTOM-UP APPROACH is the exact opposite of top down approach. It is a method of
budgeting where each department is allowed to participate in the budgeting process.
Types of Budget
FIXED OR STATIC BUDGET is a financial plan that remains unchanged regardless of the
fluctuations in actual activity.
FLEXIBLE BUDGET is a financial plan which is extremely useful in cost control geared
toward to a range of activity rather than a single level of activity.
Budgeting Methodologies
• Continuous or Rolling Budgeting - is a budgeting methodology in which a budget is
maintained for a particular time frame or time period (usually 12 months).
• Incremental Budgeting It is a budgeting process wherein the current period’s
budget is simply adjusted to allow for changes planned for the coming period.
• Life-cycle Budgeting Under this budgeting methodology, revenues, costs and
expenditures are projected over the entire life cycle of a certain product.
• Zero-based Budgeting (ZBB) is a methodology where a budget is prepared every
period from a base of zero.
• Activity-based Budgeting (ABB) applies the concepts and principles of activity
based costing (ABC) to budget development.
• Kaizen Budgeting is a Japanese term that means continuous improvement. is a
budgeting methodology that assumes gradual improvements over a long period of
time on the company's products and processes
The Budgeting Process
STEP 1: Establish the basic goals, objectives and long range plans for the company.
STEP 2: Obtain estimates of sales, production and other available resources.
STEP 3: Budget communication.
STEP 4: Budget implementation.
STEP 5: Regular reporting of the progress.
Master Budget Is a comprehensive financial planning tool that different budgets prepared
by every department. The master budget has three (3) major components:
(A) OPERATING BUDGETS
• Sales budget
• Cost of goods sold budget
• Production Budget
Raw materials purchases and usage budget
Direct labor budget
Factory overhead cost budget
Inventory budgets
• Selling and administrative expense budget
• Other expense related budgets
• Budgeted income statement
(B) FINANCIAL BUDGETS
• Cash budget
Cash receipts budget
Cash disbursements budget
• Budgeted balance sheet
• Schedules of receivables, payables, accruals and deferrals
(C) CAPITAL BUDGETS & OTHER SPECIAL BUDGETS
SALES BUDGET is the first budget to be developed. Because of this, it is known as the
ANCHOR BUDGET. All other budgets are anchored directly or indirectly sales budget.
PRODUCTION BUDGET can only be developed after the sales budget. In order to
determine the budgeted level of production in units.
DIRECT MATERIALS BUDGET, direct labor bud and factory overhead budget are prepared
after the production budget.
DIRECT LABOR BUDGET budgeted production is also the starting point in the preparation
of direct labor budget. This budget shows the budgeted direct labor hours and budgeted
direct la.bor cost.
FACTORY OVERHEAD BUDGET factory overhead budget should provide a schedule of all
manufacturing costs her than direct materials and direct labor
OPERATING EXPENSE BUDGET This is also known as the selling and administrative
expense budget.
CASH BUDGET is a financial estimation or projection of cash inflows and outflows cash
inflow and cash outflow used for planning and for over a specific period of time.
CASH RECEIPTS BUDGET shows all the cash inflows for a specific period of time.
CASH DISBURSEMENTS BUDGET shows all the cash outflows for a specific period of time.
BUDGETED INCOME STATEMENT contains all of the line items found in a normal income
statement, except that it is a projection of what the income statement will look like during
future budget periods.
BUDGETED BALANCE SHEET is a typical balance sheet in which line items ar projected or
estimated based on the previous budgets prepared.
