BUDGETINGBy: Carlo Senica

What is Budgeting?

A financial blueprint or action plan.

Translates strategic plans into measurable expenditures and anticipated returns over a period of time.

A process of creating and fine-tuning budgets.

Budgeting Process

1. Set goals

2. Evaluate & choose options

3. Identify budget impacts

4. Coordinate departmental budgets

Types of Budgets

Operating Budgets => includes day-to-day expenses; typically cover a one-year period.

Capital Budgets => outline planned outlays for investments in plant, equipment, and product development; covers three, five, or ten years.

Cash Budgets => plot the expected cash balances the organization will experience during the forecast period, based on the information from operating and capital budget. these are being prepared by finance group to ensure the company has sufficient liquidity.

** There are other different types of budget for different purposes.

Traditional Budgeting & Alternate Approches

Budget Parameter Approach Description

Time Period of the Budget

Fixed Budget (traditional) Budget period is a specific time period, coincide with company’s fiscal year.

Rolling Budget (alternate) Budget is continuously updated so that time frame remains stable.

Forecast Values

Static Budget (traditional) Presents one forecast for a given time period and does not changed during the life of the budget.

Flexible Budget (alternate)Budgeted revenues and cost are adjusted during the budget period according to pre-determined variances between budget and actual output.

Forecasting Process

Incremental Budgeting (traditional)

Previous period’s budget, actual results, and future expectations are used in determining the budget.

Zero-Based Budgeting (alternate)

Budgeting process begins from ground up, as though budget was being prepared for the first time.

Setting GoalsTop-Down (traditional) Senior management sets budget goals and imposes to the rest

of the organization.

Participatory (alternate) Those responsible for achieving the budget goals are included in setting those goals.

Kaizen Budgeting

Kaizen budgeting is a type of budgeting process in which cost reductions are built into the budget on an incremental basis so that continuous effort are made to reduce cost over a given period of time.

Fixed and Variable CostsFixed Costs

Are costs that remains constant within a wide range of production or sales volume.

E.g.

• Rent

• Equipment lease

• Indirect labor

• Depreciation

• Administrative cost

Variable Costs

Are costs that change in direct proportion to changes in activity.

E.g.

• Raw materials

• Packaging

• Direct labor

• Sales commissions

• Income taxes

Variance

Variance is the difference between budgeted result. vs actual results.

It can be favorable, if the results are better than expected.

It can also be unfavorable, if the results are worse than expected.

Unfavorable variance requires corrective action so that future results will be closer to budget.