Strategy

and the
Master
Bugdet
BUDGET
Definition:

- A budget is a financial plan of the resources needed to carry out tasks and meet financial goals.

- A quantitative expression of the organization’s goals and the cost of attaining it.

- It can be used to control a firm’s activity known as budgetary control.

- Plays an important role in:

 Allocating resources

 Coordinating operations

 Identifying constraints and limitations (bottlenecks)

 Communicating expected actions and results

BUDGET
 Authorizing activities

 Motivating and guiding implementation

 Providing guidelines for control of operations

 Managing cash flows

 Serving as criteria in performance evaluations

NOTE: During budget preparation managers should be forward-looking and relate budget to strategic
goals.
STRATEGY
Definition:
- It is a path a firm chooses for attaining its long-term goals and mission.
Importance:
- It is the starting point in preparing plans and budgets (budgets should relate to strategy).
Formulation:
- Starts with evaluating internal factors (Strengths and Weaknesses) and external factors (Opportunities
and Threats) that affect operations.
STRATEGY
Figure 5-1: Development of a Firm’s Strategy
 STRATEGIC GOALS AND LONG-TERM
OBJECTIVES
- It is presented through capital budget and master budgets.
- Strategy provides the framework within which a long-range plan is developed.

Long-Range Planning
- Identifies required actions over a 5- to 10-year period to attain the firm’s strategic goal(s).
- Often entails capital budgeting, which is a process for evaluating, selecting, and financing major projects
such as purchases of new equipment, construction of a new factory, and addition of new products.
- Capital budgets are prepared to bring a firm’s capacity into line with the needs of its long-range plan .
SHORT-TERM OBJECTIVES AND THE
MASTER BUDGET
- Short-term objectives are goals for the coming period, which can be a month, a quarter, a year, or any
length of time desired by the organization for planning purposes.
- Short-term objectives should be based on strategic goals, long-term objectives and plans, operating
results of past periods, and expected future operating and environmental factors including economic,
industry, and marketing conditions.
- Short-term objectives serves as basis for preparing master budgets.
THE RELATIONSHIPS AMONG STRATEGIC GOALS, LONG-TERM
OBJECTIVES, MASTER BUDGETS, AND OPERATIONS
Figure 5.2 The Relationships Among Strategic Goals, Long-Term Objectives, Master Budgets, and Operations
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Top Management Involvement
- For a budget to be effective, top management needs to be involved and show strong interest in budget
results.
- Too much involvement, however, may alienate lower managers (due to differing perspectives, what top
management thinks should be achieved may not be attainable by lower-level departments).
- There should be a good balance of top management involvement with lower-level managers.
- Top management ensures that budget guidelines are followed through active involvement in reviewing
and approving the proposed budget (this discourages lower-level managers set easily attainable budgets).
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeting processes
- usually include formation of a budget committee; determination of the budget guidelines; preparation of the initial budget proposal;
budget negotiation, review and approval; and budget revision.

Organization for Budget Preparation

- management assigns the most qualified personnel for budget preparation.
 Budget Committee
- composed of representatives from the different functional areas (marketing, production, finance and administration).
- generally considered an effective body to oversee preparation and administration of the budget
- they decide how budgets shall be prepared, passes on the final budget, and settles disputes between segments.
- they also receive budget reports and make policy decisions with respect to budget revisions and other problems of budget
administration.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
 Controller
- may be selected to serve as head of the committee for two major reasons:
(1) Independence from the firm's operating parts
(2) Has skills and experience of setting up a budget
- He acts as a coordinator, recommends how to prepare budgets, assembles the budget, prepares
periodic reports on variances, interprets variances and offer suggestions for improvement.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budget Guidelines
- one of the responsibilities of the committee is to provide initial budget guidelines.
- it sets the tone for the budget and govern budget preparation.
- all responsibility centers or budget units follow these guidelines.
- the starting point in developing guidelines is the firm's strategy.
- any developments that occurred since the adaption of the strategic plan; the economy and the market;
the goal for the budgeting period; and specific corporate policies (e.g. mandates for reengineering) and
operating results of the year to date should also be considered in developing the guidelines.
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
The Budget Period
- It should be long enough to show the effect of managerial policies but short enough so that estimates can be
made with reasonable accuracy.
The Different Types of Budget for Different Time Spans
 Master Budget
-is an overall financial and operating plan for a coming period.
-usually prepared on a quarterly or annual basis.
 Capital Budget
- plans for major expenditures for plant and equipment or addition of product lines.
- might cover 5 to 10 years.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
 Master Budget
-is an overall financial and operating plan for a coming period.
-usually prepared on a quarterly or annual basis.
 Responsibility Budgets
- segments of the master budget relating to the aspect of the business under a particular manager
are often prepared monthly.
 Cash Budgets
- may be prepared daily or monthly.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
The Initial Budget Proposal
- prepared by each responsibility centers and should follow the initial budget guidelines.
- in its preparation, the following factors should be considered by a budget unit:
Internal factors:
 Introduction of new products
 Adoption of new manufacturing processes
 Changes in availability of equipment of facilities
 Changes in product design or product mix
 Changes in expectations or operating processes of other budget units that the budget unit relies on and
vice versa
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
External factors:
 Competitor's actions
 Changes in the labor market
 Availability of raw materials or components and their prices
 Industry's outlook for the near term
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budget Negotiation, Review and Approval, Revision
- the head of the budget units examines initial budget proposal to determine whether it is within the
budget guidelines, is attainable and in line with the goals of the other units then the budget is negotiated
through the successive levels of the organization.
- the budget committee reviews and gives final approval to the budget, the chief executive then approves
the entire budget and submits it to the Board of Directors.
- systematic, periodic revision of the approved budget can be an advantage because updated budgets
provides better operating guidelines, however, it may encourage units not to prepare their budgets with due
diligence which is why it should only be allowed if circumstances have significantly changed.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
The Master Budget
- is a comprehensive budget for a specific period.
- consists of many interrelated operating and financial budgets.
- some firms refer to the process of preparing a master budget as profit planning or targeting.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
The Master Budget
Figure 5-3. The Master Budget
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Steps in Developing a Master Budget
1. Establish basic goals and long-range plans for the company (serves as guidelines for budget estimates).
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of sales and operating expenses.
4. Determine the effect of budgeted operating results on assets, liabilities and owner’s equity accounts.
The cash budget is the largest part of this step, since changes in many assets and liability accounts will
depend upon the cash flow forecast.
5. Summarize the estimated data in the form of projected income statement, projected statement of
financial position and projected cash flow statement.
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Sales Budget
- is the foundation in which all other short-term budgets are built.
- provides the revenue predictions from which cash receipts can be estimated and supplies the basic data (e.g., quantity of products
forecasted to be sold thus needed to be produced) for constructing budgets for production cost and selling and administrative expenses.
- the sales forecast is made after consideration of the following factors:
1. Past Sales Volume
2. General economic and industry conditions
3. Relationship of sales to economic indicators
4. Relative product profitability
5. Market research studies and competition
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
6. Pricing, advertising and other promotion policies
7. Production Capacity
8. Quality of sales force
9. Seasonal variations
10.Long-term sales trends for various product

Schedule 1
Sales Budget
For 2020

Units Price Per Unit Total Sales Revenue

Estimated Sales 6,400 800 P5,120,000
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Production Budget
- after sales budget has been set, a decision can be made on the level of production needed to support sales and the production budget as well.
- the production budget becomes a key factor in the determination of other budgets, including the direct materials budget, the direct labor
budget and the manufacturing overhead budget
- these budgets in turn are needed to assist in formulating a cash budget
Schedule 2
Production Budget
For 2020

Units to be sold 6,400

Add: Desired ending inventory 1,000
Total 7,400
Less: Beginning inventory 900
Units to be produced 6,500
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Raw Materials Budget
- can be prepared after determining the number of units to produce.
Schedule 3
Raw Materials Budget
For 2020
Materials
R S
Units required for production
R (6,500 x 3) 19,500
S (6,500 x 5) 32,500
Add: Desired ending inventory 1,300 4,600
Total units required 20,800 37,100
Less: Beginning inventory 2,200 4,000
Units to be purchased 18,600 33,100
Unit price x P10 x P30
Total purchases P186,000 P993,000
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Direct Labor Budget
- can be prepared after determining the number of units to produce.
Schedule 4
Number of units to be produced 6,500
Multiply by: Direct labor cost per unit P146
Total budgeted direct labor hours P949,000
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Overhead Cost Budget
- some overhead costs depend on direct labor hours or machine hours while other costs depend on volume or other factors.
Schedule 5
Budgeted Manufacturing Overhead
For 2020

Variable overhead: units needed to produce6,500 units

Indirect materials and supplies (@P5.85) P 38,000
Materials handling (@P9.07) 59,000
Other indirect labor (@P5.07) 33,000
Total 130,000
Fixed Manufacturing Overhead
Supervising labor 175,000
Maintenance and repairs 85,000
Plant administration 173,000
Utilities 87,000
Depreciation 280,000
Insurance 43,000
Property taxes 117,000
Others 41,000
Total 1,001,000
Total manufacturing overhead P1,131,000
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeted Cost of Sales
- can now be developed using the data from the following:

Production Budget Schedule 2

Raw Materials Budget Schedule 3
Direct Labor Budget Schedule 4
Overhead Cost Budget Schedule 5
Budgeted Statement of Schedule 6
Cost of Sales
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Marketing and Administrative Expense Budget
- as with overhead costs, marketing and administrative expenses are also made up of fixed and marketing variable components
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Cash Budget
Cash Receipts
- normally comes from cash receipts from customers but may come from sources such as additional investments, sales of assets or
borrowings.
Cash Disbursements
- data from previous budgets previously illustrated supply the basic information for the cash disbursement budget
- adjustment should be made for prepayments, accruals, purchase of new equipment, dividend payment or repayments of bank loans if
minimum cash balance is required whenever applicable.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Cash Budget
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeted Income Statement
- developed based on the data from other preliminary data and other budgets
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeted Statement of Financial Position
- developed by beginning with the current statement of financial position and adjusting it for the data contained in the other budgets
 THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeting in Service Industries
- budgeting in service firms is similar in manufacturing firms the difference is in the absence of products or merchandise
purchase budget and their ancillary budget
- the focal point in its budgeting is personnel planning
- a service firm must ensure that it has personnel with the appropriate skills and competence to perform services.

Budgeting in Not-For-Profit Organization

- their objective is to provide services efficiently and effectively, while not spending more than the allowed expenditure
level
-master budgets often become authorization document for allowable expenditures and activities
-in effect, the budget often becomes the source of both the power and limitations of the budgeted units.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Budgeting in International Setting
- subsidiaries or subdivisions of a multinational firm often have their own budgets.
- they must follow the firm’s budget procedure and coordinate their budgets with other divisions of the firm
(may be located in other countries).

Alternative Approaches in Budgeting

Zero Based Budgeting
- requires managers to prepared budgets from a zero base.
- activities or functions are only included in the budget only if they are needed.
THE MANAGEMENT PROCESS OF
PREPARING THE MASTER BUDGET
Activity-Based Budgeting
- based on activities and cost drivers of operations.
- starts with the budgeted output and segregates costs required for the budgeted output into homogeneous
cost pools.
- can be a simple extension of a firms ABC system

Kaizen (Continuous improvement) budgeting

- incorporates continuous improvement expectations into the budgets.
- promotes active engagement in reforming and altering business practices and processes.
ETHICAL ISSUES IN BUDGETING
- it includes:
preventing concealment of information
avoidance of getting a higher budget goal
inclusion of budget slack, or padding the budget, which is the practice of managers knowingly including a
higher amount of expenditures or a lower amount of revenue in a budget.
spending the budget is another issue managers often feel if they do not use all the resources they receive,
next years budget may be cut
ETHICAL ISSUES IN BUDGETING
Goal Congruence
- is a term that refers to the degree of consistency between goals of the firm, its subunits, and its
employees.
- involving employees in the budgeting process fosters goal congruence.

Authoritative or participative budgeting

- top-down budgeting is referred to as authoritative budgeting.
- bottom-up budgeting is referred to as participative budgeting.
- effective budgeting processes often combine the two types.