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Comprehensive Budgeting
Financial Planning, Budgeting, and Forecasting is typically a three-step process in determining an
organization’s financial goals.
1. Planning provides a framework for a business’ long-term financial objectives.
2. Budgeting details how the plan will be carried out month to month and covers items such as
revenue, expenses, potential cash flow, and debt reduction.
3. Forecasting takes historical data and current market conditions and then makes predictions as
to how much revenue an organization can expect to bring in over the next few months or years.

Budget is a realistic quantitative plan useful for planning and controlling company expenses, cash
flows, and earnings for a specific future period of time. The term Budgeting refers to the process of
coming up with budgets.

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.

standards for evaluating performance.

Disadvantages of Budgeting
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6. The goals and objectives identified in the budgeting process can serve as benchmarks or
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1. Budgeting is not an exact science.
2. Budgeting is time consuming.
3. The success of budgeting depends on the cooperation and participation of all members of the
organization.
4. Budgets are applied mechanically and rigidly.
5. Excessive emphasis on budgeting may give too much motivation to managers making the
information provided by them inaccurate.
h

6. Budgeting is primarily concerned with financial outcomes.

tc

Approaches in Budgeting
1. Top-Down Approach (Imposed Budgeting or Authoritarian Budgeting) - an approach in
budgeting where top management, including executives, prepares the budgets then pushes
down the budget to different department heads upon approval.
Ba

2. Bottom-Up Approach (Participative Budgeting) - an approach in budgeting where each

department is allowed to participate in the budgeting process.

Types of Budgets
1. STATIC BUDGET (Fixed Budget) - a budget prepared for a single level of activity that does not
change even when actual activity differs from planned activity.
2. FLEXIBLE BUDGET(Variable Budget) - a budget that adjusts revenues and costs when actual
activity differs from the planned activity stated in the fixed budget.

Budgeting Methodologies
❖ Budget Period - length of time for which a budget is to be prepared and implemented.
❖ Budget Committee - the key management personnel responsible for drafting the budget
manual, and coordinating/approving budgets submitted by managers.
❖ Budget Manual - a written description on how to prepare budgets that includes a planning
calendar and distribution instructions for budget schedules.
❖ Budget Planning Calendar - the schedule of activities for the development and adoption of the
budget. It includes a list of dates indicating when specific information is to be provided by/to
those who are involved in the budgeting process.
❖ Distribution Instruction - a necessary document so that those segments involved in the budget
preparation would know to whom/from whom a computed budget schedule is to be given/
acquired.

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★ Budget Report - shows a comparison of the actual and budget performance. The budget
variances, which are properly described as either favorable or unfavorable, are also shown on
the report.
★ INCREMENTAL BUDGETING - a budgeting process wherein the current period's budget is
simply adjusted to allow for changes planned for the coming period.
★ ZERO-BASED BUDGETING - a process of starting over each budget and justifying each
budgeted item as if the programs involved were being proposed for the first time every period.
★ CONTINUOUS BUDGET (Rolling Budget) - an incremental budget that adds the current period
and drops the older period to maintain a constant budget period of usually 12 months.
★ KAIZEN BUDGETING - a process that assumes continuous improvement of products and/or
processes so that budgets are based not on existing systems but on changes to be made.
★ ACTIVITY BASED BUDGETING - a process that applies mostly Activity-Based Costing (ABC)
principles and procedures to come up with budgets.
★ LIFE-CYCLE BUDGETING - a process wherein a product’s revenues and expenses are budgeted
over its entire life cycle from R&D to production to marketing to customer service.
★ STRATEGIC BUDGET - a long-term budget based on the identifications of action plans to
achieve company goals and, ultimately, its mission.
★ BUDGETARY SLACK - practice of underestimating revenues or overestimating costs to make
budget targets easily achievable in order to project a seemingly favorable performance.
★ 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

The Master Budget 24

policy and a form of control having the force of law.

A Master Budget is a financial document that includes how much an organization plans to make and
how much it plans to spend throughout a certain financial year. It is composed of operating budget
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and financial budget for a certain period of time aka Budget Period.
1. An Operating Budget indicates how much profit an organization will generate given the
assumption of revenues and expenses for a specific future period of time.
2. A Financial Budget is a financial plan which includes the cash receipts (inflows) and payments
(outflows) that occur over a period of time.
h

Master Budget
tc

(Manufacturing Setting)

Sales Budget
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↓
Production Budget
↓ ↓ ↓
Direct Materials Budget Direct Labor Budget Factory Overhead Budget
↓
Cost of Goods Manufactured and Sold Budget
↓ Operating Expense Budget
↓
Budgeted Income Statement
↓
-----------------------------------------------------------------
Capital Expenditures Budget → Cash Budget
↓

Budgeted Balance Sheet

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1. Sales Budget - also known as the anchor budget as all other budgets are anchored directly or
indirectly on the sales budget. It starts with a sales forecast.
2. Production Budget - used to determine the budgeted level of production in units.
★ BPSE Formula
Beginning Inventory xx
Production (Squeezed) xx
Sales (xx)
Ending Inventory xx

3. Direct Materials Budget

a. Raw Materials Usage Budget - used to determine the quantity and cost of materials
required to achieve budgeted production
b. Raw Materials Purchases Budget - used to determine the quantity and cost of materials
that must be purchased to meet production requirements.
★ BPUE Formula
Beginning Inventory xx
Purchases (Squeezed) xx
Usage (xx)
Ending Inventory xx

4. Direct Labor Budget - used to determine the budgeted labor direct labor hours and cost.

materials and direct labor.

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5. Factory Overhead Budget - used to determine all budgeted production costs other than direct

★ Predetermined Overhead Rate = Budgeted FOH ÷ Budgeted Activity Level (Cost Driver)

6. Operating Expense Budget - also known as the selling and administrative expense budget. It
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used to determine all budgeted period costs. Opex includes non-cash expenses such as
depreciation and doubtful accounts expense.
7. Budgeted Income Statement - summarizes the various component projections of revenue and
expenses for the budget period. It contains all of the line items found in a normal income
statement. The budgeted cost of goods manufactured and sold can also be found in this
budget.
h

8. Capital Expenditure Budget- outlines the expected capital expenditures a company will make
over a certain period. It includes the amount of money that the company plans to spend to
tc

acquire, upgrade, and/or maintain long-term assets. (To be discussed in Handout D.)
9. Cash Budget - a financial estimation or projection of cash inflows and outflows over a specific
period of time.
a. Cash Receipts Budget - shows all cash inflows for a specific period of time.
Ba

★ Accrual to Cash
Other Income Earned (Accrual) xx
Unearned Income, End xx - cash is received this month
Accrued Income, Beg xx - cash is received this month
Unearned Income, Beg (xx) - cash was received last month
Accrued Income, End (xx) - cash is to be received next month
Other Income Received (Cash) xx

b. Cash Disbursement Budget - shows all cash outflows for a specific period of time.
★ Accrual to Cash
Other Exp. Incurred (Accrual) xx
Prepaid Exp., End xx - cash is paid this month
Accrued Exp., Beg xx - cash is paid this month
Prepaid Exp., Beg (xx) - cash was paid last month
Accrued Exp., End (xx) - cash is to be paid next month
Other Exp. Paid (Cash) xx

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c. Funds available for Investing or required for Borrowing

Total Cash Receipts xx
Total Cash Disbursements (xx)
Net Increase/ (Decrease) x(x)
Beginning Balance xx
Ending Balance xx
Minimum Cash Balance (xx)
Funds for Investment / (Borrowing) x(x)

10. Budgeted Balance Sheet - is a typical balance sheet in which line items are projected or
estimated based on the previous budgets prepared. The amounts reported in this budget are
cumulative and not just for the current period.

Budgets vs. Standards

❖ Both budgets and standards are predetermined or planned costs. Usually, budgets are
compiled for both income and costs, while standards are only applied to expenditures or costs.
❖ Both budgeted costs and standard costs aim at cost control and are used for performance
evaluation. Both are reported periodically since they are being compared to actual results.
❖ Budgeted costs are expressed per total, while standard costs are per unit. Standard cost is the
budgeted cost per unit of product.

accounting system.

Problem I
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❖ Budgeted costs are not journalized, while standard costs are incorporated in the cost

QRS has the following data for the current year. It sells items for P5.00 each and uses a budgeted
20
selling price of P5 per unit.
Actual Budgeted
Units Sold 92,000 90,0000
Variable Costs 225,400 216,000
Fixed Costs 47,500 50,000
h

Requirements:
1. What is the static budget variance of revenues?
tc

2. What is the static budget variance of variable and fixed costs?

3. What is the flexible budget variance of revenues?
4. What is the flexible budget variance of variable and fixed costs?
Ba

Problem II
QRS Company budgeted merchandise purchases of 40,000 units next month. The expected beginning
inventory is 12,000 units and the desired ending inventory is 15,000 units. How much is the budgeted
sales in units?

Problem III
QRS currently produces and sells one product which is sold at P2.50 per unit. In preparing for its sales
forecast for the month of January, three states of economic conditions are being considered:

Economic Conditions Units Probability

Strong 300,000 40%
Fair 200,000 50%
Weak 100,000 10%

Sales in succeeding months are expected to increase by 10% from each month thereafter.
Furthermore, it is estimated that 1% of the gross sales will become uncollectible.

Requirements:
1. What are the budgeted units to be sold for the first quarter of this coming year?
2. How much is the amount of sales, net of doubtful accounts, for the first quarter of this coming
year?

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Problem IV
QRS, a merchandising company, has the following budgeted sales for the first four months of 2025:
January - P20,000; February - P21,200; March - P20,400; and April - P21,800.

The management has set the desired inventory level at 40% of the next month’s cost of sales. The
budgeted inventory amount on January 1 of the current period is P6,500. Gross profit rate based on
sales of 40% is applied constantly throughout the year. How much is the purchase in each month of
the year’s first quarter?

Problem V
QRS Company has the following sales and cost data last year:

Product Sales Cost

A P5,400,000 3,780,000

B 2,250,000 1,350,000

C 1,350,000 720,000

Other Expenses:
Selling Expenses P680,000
Administrative Expenses 1,260,000
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The budget for this year is based on the results of last year:
★ The selling price of A will increase by 20%.
20
★ Unit sales are expected to increase as follows: A - 5%; B - 8%; C - 10%.
★ The cost of A and B are expected to increase by 6%, while the cost of C will increase by
P140,000. The cost of C is entirely fixed.
★ Selling cost will increase by 4%.

Requirements:
h

1. What is the total budgeted sales this year?

2. What is the total cost and expense this year?
tc

Problem VI
QRS Company has the following budgeted production: April 50,000 units; May 40,000; June 45,000;
and July 60,000. Each unit of product requires 2 pcs of raw materials. The desired raw materials
Ba

ending inventory for each month is 130% of the following month’s production needs, plus 2,000. The
April 1 inventory meets this requirement.

The product is processed in two departments and the direct labor standards are for Dept A 6 hrs per
unit at P30 per hour; and for Dept B 2 hours per unit at P40 per hour.

Requirements:
1. What is the budgeted raw materials purchases in June?
2. What is the budgeted direct labor cost in May?

Problem VII
QRS has developed the following budgeted units sales for the first six months of the budgeting
period: January - 30,000 units; February - 40,000 units; March - 36,000 units; April - 42,000 units; May -
34,000 units; and June - 38,000 units.

There were 6,200 units of finished goods and 1,200 pounds of raw materials at the beginning of the
current year. The management plans to maintain finished goods inventory at 20% of the next month’s
units sales. In addition, the desired ending inventory of raw materials is at 10% of the next month’s
usage of raw materials needed to meet the production requirements.

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Based on the data provided, it takes 1.50 hours to complete a unit and workers are paid P4.00 per
hour. One unit of finished goods requires 0.60 pounds of raw materials costing P8.00 per pound. The
overhead is applied at P3.00 per direct labor hour.

For the first quarter of the year, determine the following:

1. Production budget in units;
2. Raw materials budget in pounds and peso amount;
3. Direct labor budget in hours and pesos amount; and
4. Factory overhead budget.

Problem VIII
QRS bases its selling and administrative expense budget on the number of units sold. The variable
selling and administrative expense is P4.50 per unit. The budgeted fixed selling and administrative
expense is P45,000 per month, which includes depreciation of P7,500. The remainder of the fixed
selling and administrative expense represents current cash flows. The company also estimates that
2% of the sales are doubtful as to collectibility. This amount is not included in the variable rate of the
selling and administrative expense. The sales budget shows 8,000 units are planned to be sold in July
for P10.00 per unit. How much is the operating expense budget for July?

Problem IX
QRS plans to obtain a loan to support its working capital needs for the last three months of the year.

the company.
24
The bank has required a cash budget to help them determine whether the loan should be granted to

The following data are available for the months of October to December in relation to the preparation
of the cash budget:
20
a. On October 1, the start of the loan period, the following accounts has the following balances:
★ Cash 30,000
★ Accounts Receivable, net 110,000
★ Accounts Payable 80,000
b. All sales made by the company are on credit. Past experience shows that 30% of the sales are
collected in the month of sale, 60% in the month following the sales, and the balance is never
h

collected.
c. All merchandise are purchased on account for resale with the 40% of the purchases paid
tc

during the month of purchase and the remainder are paid during the following month.
d. Budgeted sales and expenses for the budgeting period are as follows:

October November December

Ba

Sales 250,000 280,000 320,000

Purchases 150,000 140,000 180,000

Payroll 20,000 30,000 25,000

Advertising 5,000 8,000 6,500

Equipment 40,000

e. Payroll and advertising expenses are paid in the month incurred.

f. In preparing a cash budget, the company assumes that the P100,000 loan will be made in
October and repaid in April of the following year with a total interest of P8,000.
g. An income tax payment of P107,000 is needed on December 31.
h. Starting October, the company desires to maintain a minimum cash balance of P15,000 at the
end of each month.

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Requirements:
1. What are the total cash receipts for each month of the last quarter of the year?
2. What are the total cash disbursements for each month of the last quarter of the year?
3. Prepare a cash budget for the last quarter of the year showing the amount of funds available
for investing or required for borrowing.
4. Prepare a cash budget showing the ending cash balances for each month of the last quarter of
the year assuming there is no minimum cash balance requirement and the company does not
invest its excess funds.

Problem X
QRS has the following information for the year 2024:
Ending Balance Beginning Balance
Accrued Income P80,000 P46,000
Unearned Income 16,000 44,000
Prepaid Expense 22,000 18,000
Accrued Expense 30,000 24,000

During the current year, QRS presented the other income and other expenses in the income statement
amounting to P240,000 and P180,000, respectively.

Requirements:

24
1. Determine the amount of cash receipts from other income.
2. Determine the cash payments for other expenses.

Multiple-Choice Questions (Theoretical)

20
1. In a typical planning process, which of the following would be completed last
a. Vision and mission
b. Tactical goals
c. Strategic objectives
d. Operational plans
h

2. In the budgeting process, top management

tc

a. Should only be involved in the approval process.

b. Needs to be involved, including using the budget process to communicate goals.
c. Lacks the detailed knowledge of the daily operations and should limit their involvement.
d. Need to separate the budgeting process and business planning process into two
Ba

separate processes.

3. Coordinating the preparation of the budget is the responsibility assigned to which of the
following?
a. Top management c. Budget committee
b. Accounting department d. Lower levels of management

4. Which is an advantage of authoritative budgeting over participative budgeting?

a. Longer time cycle in the budgeting process.
b. Stronger commitment from lower level of management.
c. Greater flow of information from bottom to top management.
d. More emphasis on strategic plans and avoidance of budgetary slacks.

5. An extra cushion built into the budget to protect against unexpected results which normally
involves over-budgeting (padding) expenses and under-budgeting revenues to make the budget
targets easier to meet.
a. Budgetary slack c. Tactical planning
b. Continuous budgeting d. Management by objectives

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6. Which is usually perceived as being the master budget’s greatest advantage to management?
a. Increased communication c. Increased coordination
b. Performance analysis d. Required planning

7. The starting point in preparing a comprehensive master budget is:

a. Cash budget c. Production budget
b. Budgeted income statement d. Sales forecast

8. The production budget process usually begins with the

a. Sales budget c. Direct labor budget
b. Direct materials budget d. Manufacturing overhead budget

9. Which of these budgets is usually prepared first?

a. Production budget c. Materials purchases budget
b. Cash disbursements budget d. Cash budget

10. All of the following are considered operating budgets, EXCEPT

a. Cash budget c. Sales budget
b. Purchases budget d. Production budget

24
20
h
tc
Ba

References:
1. Abitago, K. G. Strategic Cost Management (2024). Real Excellence Publishing, Inc.
2. Roque, R. S. Reviewer in Management Advisory Services (2016). GIC Enterprises & Co., Inc.
3. Review Materials from Review School of Accountancy

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