Metalanguage: Big Picture in Focus: Ulod. Understand The Budgeting Framework and Develop A Master Budget

Big Picture in Focus: ULOd.
Understand the budgeting framework

and develop a master budget.
Metalanguage
In this section, the most essential terms relevant to the study of budgeting for
planning and control and to demonstrate ULOd will be operationally defined to
establish a common frame of reference as to how the texts work in your chosen field
or career. You will encounter these terms as we go through this new lesson. Please
refer to these definitions in case you will encounter difficulty in understanding
concepts.
1. Budget. It is a financial plan for the future based on a single level of activity
dealing with the acquisition and use of resources over specified time period.
2. Budgeting. This is the process of formalizing plans and translating qualitative
narratives into a documented quantitative format. It is the act of preparing a
budget; a process of identifying, gathering, summarizing and communicating
financial and non-financial information about the future activities of the
organization.
3. Master budget. It is a comprehensive financial plan for the year and is made up
of various individual departmental and activity budgets which can be divided into
operating and financial budgets.
4. Operating budget. It is a budget concerned with the income-generating
activities of a firm: sales, production, and finished goods inventories. This budget
is expressed in units and pesos.
5. Financial budget. It is a budget concerned with the inflows and outflows of cash
and with financial position.
6. Cash budget. It details the planned cash inflows and outflows.
7. Goal congruence. It refers to making sure that the personal goals of the
managers are closely aligned with the goals of the organization.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three
(3) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.com etc.
Careful planning is important to the health of any organization. Failure to plan

can lead to financial disaster. Business managers must know their resource
capabilities and have a plan that details the use of these resources. In this lesson,
the basics of budgeting are discussed, and the traditional master budget and its
components are presented.
THE BUDGETING FRAMEWORK

The budgeting process can range from the informal process undergone by a
small firm, to an elaborately detailed of several months procedure employed by large
firms. The controller of an organization is responsible for directing and coordinating
the overall budgeting process.
Advantages of budgeting:
1. can define specific goals and objectives that can become benchmarks, or
standards of performance, for evaluating future performance
2. forces communication throughout the organization
3. forces management to focus on the future and not be distracted by the daily
crises in the organization
4. can increase the coordination of organizational activities and help facilitate goal
congruence
5. can help management identify and deal with potential bottlenecks or constraints
before they become major problems
6. means of allocating resources
Role of Budgeting in Management Functions

Planning–the cornerstone of good management, involves developing objectives and
goals for the organization, as well as the actual preparation of budgets
o relate to organizations long-term goal to its short-term activities
o distribute resources and workloads
o communicate responsibilities
o select performance measure
o set goals for bonuses and rewards
Plans identify objectives and the actions needed to achieve them. Budgets are
the quantitative expressions of these plans. When used for planning, a budget is a
method for translating the goals and strategies of an organization into operational
terms.
Operating–involves day-to-day decision making which is often facilitated by

budgeting
Execution: 1) communicate expectations 2) measure performance and motivate
employees 3) coordinate activities and allot resources
Control–involves ensuring that the objectives and goals developed by the

organization are being attained; often involves a comparison of budgets to actual
performance and the use of budgets for performance evaluation purposes
Reporting: 1) communicate budget information 2) provide continuous feedback
3) support operating decisions
Reviewing: 1) evaluate performance 2) determine timeliness 3) find variances
and create solutions 4) compare planned with actual performance
Control is the process of setting standards, receiving feedback on actual

performance, and taking corrective action whenever actual performance deviates
materially from planned performance. Thus, budgets can be used to compare actual
outcomes with planned outcomes, and they can steer operations back on course, if
necessary.
Basic Concepts
1. Budgets should start with a top-down strategic plan that guides and integrates
the whole company and its individual budgets.
2. Budgeting is a management task, not a mechanical bookkeeping task which
requires a great deal of thoughtful planning and input from a broad range of
managers in a company.
3. Budgets are used throughout planning, operating and control activities.
4. Budgets are future oriented and make extensive use of estimates and forecasts.
5. Flexible budgets are based on the actual number of units produced rather than
the budgeted units of production.
6. Zero-based budgets require managers to build budgets from the ground up each
year.
7. Although we typically think of budgets as being prepared annually, changing
expectations often require that budgets be revised frequently.
Behavioral Implications of Budgeting

When budgets are used for both planning and control purposes, conflicts may
be inevitable. If managers are evaluated and compensated according to whether
they “meet the budget,” they may have incentives to pad the budget, thus making the
targets easier to reach. This may lead to unethical behaviors and is clearly not
beneficial for the company as a whole. Companies can either take punitive actions
or more positive steps such as assuring managers that performance evaluation will
be done in a fair and equitable manner and will include other factors.
Budgetary control-an act of using budgets to control an organization’s activity
Budgetary slack–an intentional underestimation of revenues and/or overestimation

of expenses in a budgeting process; a technique applied by several operating
managers in order to report favorable variances
Budget Models
Static Budgeting–costs and expenses are not segregated to fixed and variable
components and the budgeted costs, without adjustments to actual capacity, serve
as the basis in evaluating actual performance
Flexible Budgeting–costs and expenses are segregated to fixed and variable
components giving way to the determination of estimated costs based on actual
capacity
Continuous (rolling) Budgeting–a time frame is maintained (i.e. 12 months, 6
months, etc.) and when a segment in a budgeted time frame expires and is dropped,
a new segment is to be added to maintain the same time frame.
Imposed Budgeting–budgets are prepared by top management with little or no
inputs from operating personnel
Participatory Budgeting–budgets are developed through joint decision making by
top management and operating personnel
Program Budgeting–an approach that relates resource inputs to service outputs; it
generally starts by defining the objectives by output results rather than in terms of
quantity of input activities
Zero-based Budgeting–activities to be incurred are to be prioritized based on its
order of relevance in line with a defined goal in the coming period without regard to
past experiences or present condition
Life-cycle Budgeting–costing is done over the entire life span of a product starting
from its period of conception (e.g. research and development), to infancy (e.g.
product introduction), growth (e.g. acceptance), expansion, up to maturity (or
decline); it includes all costs expected to be incurred in the research and
development, design, commercial production, marketing, channels of distribution,
customer services, and post-sales services of a product to determine the most
strategic price for market dominance, saturation or influence
Static vs. Flexible Budgets

1. Static budgets are set at the beginning of the period and remain constant. They
are useful for planning and operating purposes, but can be problematic when
used for control. Control requires the comparison of actual outcomes with
desired outcomes. When static budgets are used and actual sales are different
from budgeted sales, a comparison is inaccurate.
2. Flexible budgets take differences in cost due to volume differences out of the
analysis by budgeting based on actual production. They can be accurately used
for control purposes because any differences in cost caused by differences in
volume of production have been removed.
The Budget Committee (Management Committee or Executive Committee)–

primarily responsible in developing and institutionalizing budgetary systems and
processes; consists of key functional and process executives such as the finance
manager, production manager, human resource manager, purchasing manager,
quality control manager, information resource manager, design and engineering
manager, logistics manager and others
Budget Manual–a detailed set of information and guidelines about the budgetary
process; includes 1)statement of budgetary purpose and its desired results 2) a
listing of specific budgetary activities to be performed 3) a calendar of scheduled
budgetary activities 4) sample budgetary forms, and 5) original, revised and
approved budgets
Master Budget–the comprehensive set of budgets, budgetary schedules and pro
forma organizational financial statements, the components of which are as follows:
Operating Budgets Financial Budgets
Sales Budget Balance Sheet Budget
Inventory Budget Statement of Cash Flows Budget
Production Budget Statement of Changes in Owners’ Equity Budget
Materials Purchases Budget Schedules of receivables, payables, accruals and
deferrals
Direct Labor Budget
Factory Overhead Budget
Selling and Administrative Budget
Income Statement
Budgeting for Sales

1. All organizations require the forecasting of future sales volume and the
preparation of a sales budget.
2. The sales forecast and the sales budget are the starting points in the preparation
of production budgets for manufacturing companies.
Factors in Forecasting Sales

1. Historical data, such as sales trend, competitors, and the industry
2. General economic trends or factors, such as inflation rates, interest rates,
population growth, and personal spending levels
3. Regional and local factors expected to affect sales
4. Anticipated price changes in both purchasing costs and sales prices
5. Anticipated marketing or advertising plans
6. The impact of new products or changes in product mix on the entire product line
7. Other factors, such as political and legal events and weather changes
All the remaining budgets and the decisions that are made based on their
forecasts are dependent upon this estimate of sales. It is important to estimate sales
with as much accuracy as possible. A small error in a sales forecast can cause
larger errors in other budgets that depend on the sales forecast.
Quick assets
cash, short investments, AR, inventories, prepaid expenses

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Big Picture in Focus: ULOd.

Understand the budgeting framework

Careful planning is important to the health of any organization. Failure to plan

THE BUDGETING FRAMEWORK

Role of Budgeting in Management Functions

Operating–involves day-to-day decision making which is often facilitated by

Control–involves ensuring that the objectives and goals developed by the

Control is the process of setting standards, receiving feedback on actual

Behavioral Implications of Budgeting

Budgetary control-an act of using budgets to control an organization’s activity

Budgetary slack–an intentional underestimation of revenues and/or overestimation

Static vs. Flexible Budgets

The Budget Committee (Management Committee or Executive Committee)–

Budgeting for Sales

Factors in Forecasting Sales

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