Module 6:

Strategy and the

Master Budget
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BUDGET
- a realistic plan expressed
in quantitative terms for a
certain future period of
time.

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BUDGET COMMITEE
- composed of key
management persons who are
responsible for overall policy
matters relating to the budget
program and for coordinating
the preparation of the budget
itself.
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GOAL CONGRUENCE
- the consistency or agreement
of individual goals with
company goals.
-the alignment of the
individual employee’s
objective with the company’s
objectives.
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ADVANTAGES OF BUDGETING
- used by top management to
communicate the plans and
goals throughout the
organization.
- force management to think
about and plan for the future.
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ADVANTAGES OF BUDGETING
-resources are more
appropriately allocated.
-potential bottlenecks can
be discovered.

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ADVANTAGES OF BUDGETING
- promotes coordination of the
activities of the entire
organization.
- goals and objectives identified in
the budgeting process can serve
as benchmarks or standards for
evaluating performance.
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TYPES OF BUDGETS
1. Continuous (Rolling Budget)
– revised on a regular basis.
2. Fixed – based on only one
level of activity (sales or
production volume).

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TYPES OF BUDGETS
3. Flexible – a series of budgets
prepared for many levels of
activity.
4. Incremental – the current
period’s budget is adjusted to
allow for changes planned for
the coming period.
TYPES OF BUDGETS
5. Zero based budgeting –
prepared every period from a
base of zero, regardless of
previous results.
6. Life cycle – revenues and
expenses are estimated over
the product’s entire life cycle.
TYPES OF BUDGETS
7. Activity-based – applies the
ABC principles and procedures.
8. Kaizen – assumes the
continuous improvement of
products and processes.
9. Governmental
THE BUDGETING
PROCESS

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THE BUDGETING PROCESS

-the process is dependent on

the organizational structure
and purposes.

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Master Budget
Master budget – encompasses
the organization’s operating
and financial plans for a
certain future period of time.
period of time = budget period

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Master Budget
- the budgeting process normally
starts with the basic question.
“is there a market for the
business?”
 as such, the master budget
starts with the preparation of
the Sales Budget.
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 Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET
R/M BUDGET D/L BUDGET FCTY OH BUDGET

BUDGETED COGS
BUDGETED INCOME STATEMENT
BUDGETED STATEMENT OF FINANCIAL POSITION

BUDGETED STATEMENT OF CASH FLOW

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Sales Budget
- the projected amount of units a
company anticipates selling in a
set period of time and the
revenue it could earn.
- it is a forecast based on trends
and the business environment.
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Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET

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Production Budget
- based on the budgeted sales
and inventory policies.
Inventory policy is based on
the number of units to be
sold and the desired level of
inventory.
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Production Budget
Budgeted sales 100
Add desired finished
goods ending inventory 10
Total needed inventory 110
Less expected beginning inv 20
Budgeted production 90
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 Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET
R/M BUDGET D/L BUDGET FCTY OH BUDGET

BUDGETED COGS

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Direct Materials Budget
- based on the budgeted
production.
direct materials used
budget
direct materials purchases
budget
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direct materials used budget
- based on the budgeted
production and the standard
materials used per unit.
Budgeted production 90
Std direct materials/unit .3
Budgeted direct material used 27
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direct materials purchases budget
Budgeted direct material used 27
Add desired materials
inventory end 3
Total r/m inventory needed 30
Less expected beg r/m inv 6
Budgeted r/m purchase 24
Direct Labor Budget
- based on the budgeted
production and the number of
standard direct labor hours
needed per unit of production.
- the std labor hours and the std
rate per hour are taken from
the standard cost sheet.
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Direct Labor Budget
Budgeted production xx
x std direct labor hrs/unit xx
Budgeted direct labor hrs xx
x std direct labor rate/hr Pxx
Budgeted direct labor cost Pxx

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Factory Overhead Budget
- Fixed overhead: is constant in
total and the std FOH rate is
based on normal capacity.
- FOH rate per unit varies based
on the budgeted production.
- In short term budgeting the std
FOH rate is considered constant.
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Factory Overhead Budget
-Total variable OH costs
change in relation to the
level of production.
-Unit variable cost is
constant.
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 Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET
R/M BUDGET D/L BUDGET FCTY OH BUDGET

BUDGETED COGS
BUDGETED INCOME STATEMENT

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Budgeted Income Statement
- Operating expenses are also
estimated in details and
separate projections are done
for marketing, selling,
distribution, research &
development, customer service
and administrative expenses.
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 Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET
R/M BUDGET D/L BUDGET FCTY OH BUDGET

BUDGETED COGS
BUDGETED INCOME STATEMENT

BUDGETED STATEMENT OF FINANCIAL POSITION

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Budgeted Statement of Financial Position

- the estimated value of assets,

liabilities, and equity in the
foreseeable future.
- considers foreseen increases or
decreases in assets, e.g.,
acquisition of fixed assets,
depreciation and write-offs.
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 Overview of the Master Budget
SALES BUDGET
PRODUCTION BUDGET
R/M BUDGET D/L BUDGET FCTY OH BUDGET

BUDGETED COGS
BUDGETED INCOME STATEMENT
BUDGETED STATEMENT OF FINANCIAL POSITION

BUDGETED STATEMENT OF CASH FLOW

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Budgeted Statement of Cash Flow

- Shows the foreseen sources of

cash inflows and foreseen cash
outflows.
- It takes into account capital
expenditures (assets purchased
have a useful life of one year or
more).
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Budgeted Financial Reports
- Income Statement, Balance
Sheet, Statement of Cash Flows
generally follow the same format
with the actual financial
statements except that they
contain projected figures.

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EXERCISE
PROBLEMS 1 – 4, 6 pp 129 – 134

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