SAN BEDA UNIVERSITY

College of Arts and Sciences

DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

INTRODUCTION
Profit planning involves the consideration of risks and different what-if scenarios in relation to the
goals and objectives of a company and the existing internal and external environment for
determining the planned sales revenues and expenses which will lead to the computation of the
expected net income or loss is embodied in the budget.

BUDGETING
Budget is the financial expression of planned activities. It is putting the equivalent monetary
value for the different activities that management wishes to undertake.

Management will be generally plan on the company’s desired market share in the industry, on how
products will be produce, selling activities like advertisements, promos, sponsorships,
administrative activities like changes in general policies, promotions and replacements of
managers, accounting systems, research and development. All of this activities would generally
be in line with the set goals and objectives in relations to the chosen strategy which will guide
management in the generation of the overall action plan which outlines the different activities
in order to execute the strategy, the people in charge, the resources needed and the timeline.
This action plan will now be the basis for the construction of the budget.

The budget serves different functions during planning, execution and controlling activities of
managers. The diagram below summarizes the different functions of the budget.

Planning
Controlling
Execution
1. Communication &
1. Serves as a standard
Coordination of plans and 1. Monitoring of the different
against which actual
views of managers. activities – progress
results can be compared.
2. Allocation of resources to 2. Anticipation of additional
(Institutional Performance)
various programs & resources needed
2. Evaluation of Managers
projects

Under Planning, the role of budget includes communication and coordination of plans and views
of managers; This is to facilitate goal congruency, which means the consistency of actions of
different functional areas (Marketing, Sales, Operations, Production, Finance, Human
Resource, etc.) of the business to assure alignment with the overall goals and objectives. Also,
another function of the budget is to ensure the proper allocation of the company’s resources to
important and critical programs and projects.
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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Under Execution, comparing the budget to the accounting records on what has already been
earned and incurred gives management the idea of what is still to be earned and to be
incurred. This is to effectively monitor the different business activities as they progresses.
Also, since business environment changes, monitoring the budget can effectively guide
management as to anticipating the need for the acquisition of additional resources as the need
arises.

Under Controlling, the budget will be the basis on the computation of variances for
institutional evaluation. Variances are important for it guides management on what area
should be investigated and analyzed; this is what we call management by exception. The
budget will also serve as the basis for the evaluation of the performance of the individual manager,
mainly, on how they have executed the planned activities.

It is worth noting that the budget serves as the connection between the planning and controlling
functions of management. The budget is set during the planning stage and is used to evaluate
performance during the controlling stage which will be the basis for the following period’s budget.

THE BUDGETARY PROCESS

Before discussing the budgetary process, it is worth looking into the different tools and people
involve in the process. The most important tool is the Budget Manual which clearly defined the
objectives and procedures involved in the preparation of the budget. The manual gives
guidance, especially to new members of management, on how the budgetary process is executed.
However, the manual should be reviewed from time to time to ensure the relevance of its
guidelines with the existing environment and situations.

The company’s Budget Committee usually consists of members of the board of directors or
senior management representing each area of the business and they have responsibility for
approving each functional area budget and the adoption, changes and modification of the
budget manual. It is also a standing committee responsible for overall policy matters relating
to the budget, coordinating the preparation of the budget, resolving disputes related to the
budget and approving the final budget.

The Budget director has direct responsibility for construction of the company’s budget as
well as determination of the accompanying procedures (deadlines, information formats, etc.).

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

The manager of the different responsibility centers, which is a function or section of the
company, is responsible the budget targets for the particular center.

The management process of preparing the budget will start with the communication of the details
of the budget policy and guidelines to those people responsible for the preparation of budgets. This
will be followed by the analysis and investigation of the business environment in which the
company is currently into that will lead to the determination of the factors which can restricts the
company’s output. Preparation of the sales budget and the initial preparation of various budgets
under the identified restrictions and considerations follow. Most of the time, after the budget
committee has reviewed the initial budgets prepared, there will now a negotiation of budgets with
superiors. In terms of justification of the planned activities and the required resources in the
execution of such planned activities. The main objective here is to ensure that only activities
that are in-line with the company’s objectives be carried out.

The next step is the coordination and review of budgets. This is to ensure goal congruency that is,
all activities of the different functional areas will be in harmony, meaning whatever units that the
sales department will be selling is produced by at the right time by the production department, with
the human resource department being able to provide a workforce for both the sales and production
department and the finance department ensuring that the funds are available to support the
activities of the other departments.

The last step is the final acceptance of budgets. This is after the budget committee has finished
reviewing and presenting the budget for approval to the board of directors. Once approved, the
budget is now adopted and will be the basis for all requests for disbursements and monitoring of
activities.

It is worth noting that the budgetary process differs from company to company. But what was just
described above commonly represents the general structure of the budgetary process.

ADVANTAGES OF BUDGETING
1. Budgets can be used by top management to communicate its plans and goals throughout
the organization.
2. Budgets force management to think about and plan for the future.
3. Through budgeting, resources are more appropriately allocated.
4. Through budgeting, potential bottlenecks can be discovered before they occur.
5. Budgeting promotes coordination of the activities of the entire organization.
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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

6. The goals and objectives identified in the budgeting process can serve as benchmarks or
standards for evaluating performance.

TYPES OF BUDGET
Budgets can be classified depending on the perspective that we will be looking at.
1. As to activity base
a. Static – projection of budget data using one level of activity and ignoring different
levels of activity.
b. Flexible – projection of budget data for various level of activity.
2. As to approaches / basis of preparation
a. Incremental (Rolling) Budgeting – the starting point for the new budget is the
budget for the previous year adjusted for actual results achieved.
b. Base Budgeting – the organization’s activities and departments are given a
minimum base package of resources.
c. Zero-Based Budgeting – each organizational unit is assumed to require no
resources and all budgetary requests must be fully justified in terms of the element’s
continued usefulness.
3. As to coverage – generally, the longer the time frame the less detailed the budget
a. Short -term (Current) Budget – one that is related to current conditions and
usually prepared on an annual basis and then broken into either quarterly or monthly
budget.
b. Long-term Budget – one that is established as a plan for the long-term
development of the business and covers a period od between 3 to 20 years.
4. As to subject matter
a. Master Budget – usually prepared annual for the upcoming years, it consists of
different financial schedules intertwined with one another ultimately producing
projecting financial statements.
1) Operational Budget
a) Sales Budget
b) Production Budget
c) Purchase & Direct Materials Budget
d) Direct Labor Budget
e) Manufacturing Overhead Budget
f) Selling and Administrative Budget
g) Budgeted Income Statement
2) Financial Budget
a) Cash Budget
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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

b) Budgeted Balance Sheet

b. Capital Budget – covers the different investment projects of the business
5. As to parties involve:
a. Participating Budget (Self-Imposed / Bottom-up Planning) – a financial plan
develop through collaborative efforts of top executive and operation personnel.
b. Imposed Budgeting (Top-down Planning) – a financial plan develop by top level
executive with little or no consultation with the operation personnel.

OTHER BUDGETING CONCEPTS

• Life-Cycle Budget – A product’s revenues and expenses are estimated over its entire life
cycle (from research and development to withdrawal of customer support). This concept
is helpful in target costing and target pricing. It accounts for and emphasizes the
relationships among the costs at all stages of the value chain, such as research and
development, design, production, marketing, distribution, and customer service.
• Activity-Based Budgeting – Unlike in the traditional emphasis on functions or spending
categories, activity-based budgeting applies the ABC principles and procedures to
budgeting, The activities are identified, a cost pool is established for each activity, a cost
driver is identified for each pool, and the budgeted cost for each pool is determined by
multiplying the budgeted demand for the activity by the estimated cost per unit of such
activity.
• Kaizen Budgeting – Kaizen is a Japanese term that means continuous improvement.
Thus, Kaizen budgeting assumes the continuous improvement of products and processes;
the effects of improvement and the costs of their implementation are estimated. Kaizen
budgeting is based not on the existing system but on changes that are to be made.
• Governmental Budget – Unlike in a private-sector budget, a governmental budget is not
only a financial plan and a basis for performance evaluation but also an expression of public
policy and a form of control having the force of law.
• Program Budget – Budget for the major programs or projects that the company plans to
undertake.
• Responsibility Budget – Budget for a responsibility center.

THE MASTER BUDGET

The Master Budget is the compilation of different financial schedule pertaining to an
operating period, which will ultimately produce the projected financial statements of the
company. The master budget is composed of operating and financial budget. Operating budget

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

will result to the construction of the budgeted income statement while Financial budget will
be the source for the construction of the projected cash flow and balance sheet.

The Operating Budget will start with the forecasted sales and ends when the forecasted income
statement is prepared. The major component of the operating budget is the sales budget,
production budget, purchase budget for direct materials, direct labor and manufacturing
overhead budget and the operating expenses budget.

The Sales Budget is a summary of expected sales for the year and it is the starting point of
the Master Budget. It is prepared by simply multiplying forecasted units sales volume for each
product by the anticipated unit selling price. In forecasting the sales volume, there are a lot of
available quantitative forecasting techniques like extrapolation and judgmental method.
Under the Extrapolation, there is the moving average, exponential method, and the trend line or
linear function. Under the Judgmental Methods are the Delphi Method, Task Force Composite
and the Customer Expectation Method which is simply a sales forecast based on the result of the
survey to customers. However, other non-quantitative factors like historical sales, general
economic conditions, industry status, researches, and trends among others should also be
considered. In presenting sales budget, sales can be classified using the product line, geographical
locations, channels of distribution, functional departments, etc.

Budgeted Production is used to produce the necessary amount to support the forecasted quarter’s
sales, plus an inventory “buffer” or safety stock that will be carryover for the subsequent quarter,
deducting any inventory that is already in finished goods inventory at the start of the quarter. The
challenge for management is that if production capability or capacity will not be enough to cover
for the forecasted sales, the different actions that may be considered by management, but no limited
to the following:
 Sub-contracting
 Overtime or work-shifting
 Purchasing or leasing additional machinery
 Purchase bought-out components
 Improvements in the method of production
The production budget is simply an inverted cost of goods sold computation. Since what we are
trying to determine is the number of units to be produced with a given sales forecast, we can
compute the number of units to be produced, by considering the inventory policy of the company.
The following diagram shows the relationship between cost of goods sold and production budget.

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Cost of Goods Sold

Beginning Inventory Ending Inventory

Goods Available for

Sale/Total Goods
Required

Units Produced Units Sold

Production Budget

Purchase Budgeted has the same “calculational” structure as the production budget since they are
pertaining to inventory. However, the starting point of the budget is based on the required units in
production. It is to be noted that a separate budget will be prepared for each of the direct materials
component of a product. Hence, if a product requires five years raw materials, then five direct
materials purchase budget will be prepared.

The purchase budgeted schedule consists of two parts: direct material needs (same with the
production budget with the production budget as the basis) and required payments for those direct
materials. In terms of the direct material needs, it is just the inverse of the direct materials used
computation in the statement of cost of goods manufactured. The following diagram shows the
relationship between the direct material purchase budget and the raw materials used.

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Raw Materials Used

Beginning Inventory Ending Inventory

Goods Available for

Use/Total Materials
Required
Units Used in
Units Purchased
Production

Direct Materials Purchase Budget

Units used in production, under the direct materials purchase budget is computed by simply
multiplying the number of units to be produced by the raw materials required per unit.

Direct Labor Budget is simpler and straight forward since it has no inventory. Whatever is the
direct labor required for production is also the budget for the period. The only information needed
is the direct labor hours required per unit to be produced and the direct labor rate per hour.

Required Production Units

Multiply by: Direct Labor Time Per Unit
Total Direct Labor Hours Required
Multiply by: Direct Labor Cost Per Hour
Total Budgeted Direct Labor Cost

Overhead Budget is straight forward since it also does not consider the maintenance of inventory.
However, unlike direct labor, overhead has two component, variable and fixed overhead. The good
news is that variable overhead are budgeted the same way as direct labor, while fixed overhead,
since it is assumed to be constant, will be budgeted at the same amount from period to period. The
pro-forma of the overhead budget follows:

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Required Production Units

Multiply by: Chosen activity base time Per Unit
Total Activity Base Hours Required
Multiply by: Variable Overhead Cost Per Activity Base
Total Budgeted Variable Overhead Cost
Add: Budgeted Fixed Overhead Costs
Total Budgeted Manufacturing Overhead

Budgeted Operating Expense is classified into variable and fixed overhead. Operating expenses,
selling and administrative expenses, are assumed to be incurred at the point of sale, hence, the
basis is the number of units to be sold.

Basically, the process of budgeting operating expenses is the same with the overhead budgeting,
we will compute variable selling and administrative by simply multiplying the rate per unit to the
number of units to be sold while fixed selling and administrative is assumed to remain constant.

THE BUDGETED INCOME STATEMENT

We are now ready to determine the expected profitability of operations with the construction of
the budgeted income statement. This, it is viewed as the important end-product of the operating
budgets since it can provide a basis for evaluating company’s expected performance.

FINANCIAL BUDGET
The Financial Budget is shows how the company’s resources will be affected by the forecast
operation. It is comprised of the Cash Budget which shows how cash will be moving during the
period and the Budgeted Balance Sheet will show how the company’s resources and obligation
will be moving with respect to the expected operation.

THE CASH BUDGET

The Cash Budget has three parts, the expected cash receipts, cash disbursements, and the
required financing. The cash budget plays an important role in financial management since it
shows management if there will be a need for additional financing before it actually occurs
thus, arrangement can be more flexible and advantageous for the company, also, if there will
be any excess cash, management can already make investment evaluation to ensure cash will
not be idle, hence, the budget contributes to a more effective cash management program. The
pro-forma of the cash budget follows:

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Cash Balance, Beginning

Add: Receipts
Total Cash Available Before Current Financing
Less: Disbursements
Excess (Deficiency) of Cash Available Over Disbursements
Financing
Cash Balance, Ending

Budgeted Cash Receipts usually focuses on the principal source of cash receipts which are the
revenues of the company. Revenues of the company can either be on cash basis or on credit. In
terms of credit revenues, the collection pattern needs to be established in order to determine the
forecasted cash inflows for the period. Although the focus is on operating cash flows, other sources
of cash inflow can also be included like expected interest and dividend receipts as well as proceeds
from planned sales of investments, plant assets, and capital stock.

Budgeted Cash Disbursement usually focuses on the different payments that will be made by the
company during the period. The main sources of cash disbursements are the expenses presented in
the operating budgets like materials purchase budget, direct labor and overhead budget and the
operating expenses budget. The general assumption is that expenses are paid in the same period
it is incurred unless it is a non-cash expense like depreciation and amortization and those
that were acquired on credit wherein the payment pattern and terms should be established.
Other non-operational disbursement will also be included like dividend payments, planned
acquisition of investments, plant assets, and treasury shares.

Financing is a matter of company policy a minimum cash balance requirement might be included.
This is to provide a cushion that can absorb forecasting errors and provide some allowance made
for contingencies and miscalculations in planning. In relation to the minimum cash balance
requirement and the forecasted balance, might result to additional financing needs or excess cash
that can be appropriated for investing activities. Financing will occur when the amount of cash
goes below zero or the minimum cash balance. Borrowing is assumed to be made at the beginning
of the period and payment is made when there is already sufficient cash – not below zero or the
minimum cash balance. Interest payments are made at the time of settlement of the principal unless
otherwise stated.

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

THE BUDGETED BALANCE SHEET

A projection of financial position at the end of the budget period is presented in the budgeted
balance sheet. It is developed from the balance sheet of the preceding year and the operating and
cash budgets for the current year. The budgeted balance sheet presents the projected changes in
the company’s resources and obligations with respect to the effect of the forecasted operations and
cash movements. It has the same format with the regular financial statement; however, it is based
on budgeted data.

FLEXIBLE BUDGET
Flexible Budget was able to prepare a budget that can be re-stated as the activity level changes.
The purpose of the flexible budget is to bridge the gap between planning budget and actual
performance and to isolate each differences. A flexible budget is constructed based on the
actual level of activity and the revenue and cost formulas from the planning budget. We
should be able to recognize the fact that under the static budget any variance between the
budget and actual performance are due to two basic causes: differences in activity level and
differences in spending.

Under the flexible budget, the effect due to changes in activity level is being eliminated thus
allowing a concentration on the effect of differences in spending since flexible budget is simply
a restated budget that will reflect the actual activity level.

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Difference between Static and Flexible Budgeting

Fixed (Static) Budget Flexible Budget
1. Projection of budget data at one level of 1. Projects budget data for various levels of
activity activity
2. Ignores data for different levels of activity 2. Essentially, a series of static budgets at
different activity levels
3. Always compares actual results with the 3. Budgetary process more useful if it is
budget data at the activity level used in the adaptable to changes in operating conditions
master budget
4. Appropriate for evaluating a manager’s 4. Can be prepared for each type of budget in
effectiveness in controlling costs when the the master budget.
actual level of activity closely approximates
the master budget activity level and behavior
of the costs is fixed in response to changes in
activity.
5. Appropriate for fixed costs
6. Not appropriate for variable costs
In computing variances
1. Compare the budgeted and actual amount 1. Identify variable costs and determine the
disregarding any difference in activity level. rate per unit.
2. Multiply the rate per unit to the actual
activity level – serving as the budgeted
amount.
3. Determine variances by comparing the
newly computed budgeted amount and the
actual amount.

Steps in Constructing the Flexible Budget

1. Determine the budgeted selling price per unit, variable cost per unit, and budgeted fixed costs.
2. Determine the actual quantity of input.
3. Determine the flexible budget for revenue by simple multiplying the selling price per unit to the
actual quantity of input.
4. Determine the flexible budget for costs. It will be helpful to remember the cost function y=a+bx.
This means that only the total variable costs will change.

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 SAN BEDA UNIVERSITY
College of Arts and Sciences
DEPARTMENT OF ACCOUNTANCY AND TAXATION
Course Code: MANACC3
Lecture Notes No. 2
Budgeting
Prof. Gerard Joseph Javier, CPA, CrFA, MBA
First Term, Academic Year 2024-2025

Variances
Variances are simply the differences between what was planned and the actual result of
operation. In relation to flexible and static budgets, there are three types of variances that we
will be looking into, activity, revenue and spending variance.

Activity Variance
Activity Variance is the difference between a revenue or cost item in the static budget and
the same item in the flexible budget. It results from the difference between the level of activity
assumed in the planning budget and the actual level of activity used in the flexible budget.

Revenue Variance
Revenue Variance is the difference between how much the revenue should have been at the
actual level of activity and the actual revenue for the period. Favorable revenue variance occurs
when the revenue is greater than expected at the actual level of activity for the period while
unfavorable revenue variance occurs when the revenue is less than expected at the actual level of
activity for the period.

Spending Variance
Spending Variance is the difference between how much an expense should have been at the
actual level of activity and the actual amount of expense incurred. Favorable spending variance
occurs when the cost is less than expected at the actual level of activity for the period while
unfavorable spending variance occurs when the cost is greater than expected at the actual level of
activity for the period.

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