Capalad, Riznel Anthony A.

BSAIS 4 A-1S
FIMO411

What is a budget?

- A budget is used to forecast the financial results and financial position of an

entity for a future period. It is used for planning and performance measurement
purposes, which can involve spending for fixed assets, rolling out new products,
training employees, setting up bonus plans, controlling operations, and so forth.

Give at least five primary purposes of the budget and briefly describe each.

1. Planning – The most obvious purpose of a budget is to express a plan of action

in financial terms. The budgeting process forces the individuals within a business
to plan. For example, in formulating a quarterly budget the various managers
must work together to plan for the expected sales demand, as well as the staffing
and supplies needed to meet the anticipated demand. These decisions will drive
the estimation of revenues and costs.

2. Facilitating communication and coordination – For a business to plan operations

effectively there must be good communication and coordination between all
managers. The budgeting process provides a formal mechanism to enable this to
take place. The budgeting process pulls together the plans developed by each
manager across the organization.

3. Allocating resources – Generally, a firm's resources are limited, and budgets

provide one way of allocating resources among competing uses. In an
organization, various departments/divisions would be competing for resources
and senior management would use the budgeting process to consider the many
alternative uses that could be made of the limited resources available to the
company. The budgeting process provides a forum for evaluating alternative
uses of those limited resources.

4. Controlling profit and operations – The budget can serve as a benchmark to

allow comparison against actual financial results at all levels of a business. For
example, within a sales department, a report that compares actual sales to
budgeted sales may be prepared on a weekly basis to help sales staff exercise
some control over total sales. In addition, the budgeted costs of a customer
service department may be compared with actual costs each month to highlight
areas where there needs to be greater cost control. As part of the budgeting
process, standard costs are often developed for major production inputs (such as
 direct materials used in production) or activities. These ideal costs provide
benchmarks to help managers control financial resources.

5. Evaluating performance and providing incentives – Comparing actual results with

budgeted results also helps managers to evaluate the performance of individuals,
departments, divisions, or the entire company. Since budgets are used to
evaluate performance, they can also be used to provide incentives for people to
perform well. For example, in many companies, managers and other employees
may have part of their salary based on whether they exceed their budget target

What is a master budget and what are the different types of budget in it?

- The master budget is the aggregation of all lower-level budgets produced by a

company's various functional areas, and also includes budgeted financial
statements, a cash forecast, and a financing plan. The master budget is typically
presented in either a monthly or quarterly format, and usually covers a
company's entire fiscal year.

- The budgets that roll up into the master budget include:

1. Direct labor budget
2. Direct materials budget
3. Ending finished goods budget
4. Manufacturing overhead budget
5. Production budget
6. Sales budget
7. Selling and administrative expense budget

What is a pricing model and what are its types?

- Pricing modeling refers to the methods you can use to determine the right price
for your products. Price models take into consideration factors such as cost of
producing an item, the customer's perception of its value and type of product—for
example, retail goods compared to services. They are often visually represented
on a chart such as a demand curve. The best pricing model will be the one that
maximizes revenue for your particular business, and the strategy you use might
vary between products and over time.

- Types of Pricing Model

1. Cost-plus pricing model - To use cost-plus pricing, you calculate the total cost
of materials, labor overhead that go into making a product and then adding a
markup so you earn a profit. In order to use this model, you'll want to identify
those costs that contribute to producing your product and perform a careful
 analysis of market factors to determine the appropriate markup percentage.
Consider evaluating the standard markup in your industry as well as location
and demand when deciding when and how to use this strategy.

2. Value-based pricing model - Value-based pricing uses the customer's

perception of your product's value to set prices. Using this strategy involves
measuring and analyzing your customer base's ideas about your products
worth. Since this strategy doesn't necessarily take the cost of production into
account, it is often best suited for products and industries where prices
generally exceed costs by a healthy margin.

3. Hourly pricing model - Hourly pricing is used primarily to price services rather
than goods or physical products. This pricing model often takes factors such
as the value of the provider's labor and any associated expenses into
account. Hourly pricing can require more documentation than other kinds of
pricing, especially on the part of the service provider, because customers
often like to know exactly what tasks were accomplished in the period of time
they paid for.

4. Fixed pricing model - Fixed pricing, also known as project-based pricing,

involves setting a price for an entire contract or project. This method offers
consistency for the customer and might maximize profits if the business can
complete the project efficiently.

5. Equity pricing model - In some cases, you may be willing to accept equity, or
stock in a company, as compensation for your product or services. Choosing
to offer equity pricing can depend on factors such as the size and success of
a client company as well as the anticipated performance of their stock. You
might also choose to use a combination of a different pricing model and
equity pricing if your situation requires cash income and long-term value.

6. Performance-based pricing model - Performance-based pricing relies on the

quality of a specific service provided to determine the price. This model works
best when you can document the outcomes of your work and agree on
payment for those outcomes ahead of time.

7. Retainer pricing model - Retainer pricing involves determining prices for

service and agreeing upon them with the customer before work is completed.
Retainer prices can be set using the value of the service provided
For budget/ forecast-ing, we develop future account balances (I/S or B/S) based on their
nature. For the following FS accounts, how will you create or arrive at their budget
amount?

1. Depreciation and amortization expense – A business will calculate these

expense amounts in order to use them as a tax deduction and reduce its tax
liability. Amortization is the practice of spreading an intangible asset's cost over
that asset's useful life. Depreciation is the expensing of a fixed asset over its
useful life.

2. Salaries expense – Salaries expense is the fixed pay earned by employees. The
expense represents the cost of non-hourly labor for a business. It is frequently
subdivided into a salaries expense account for individual departments, such as:
Salaries expense - accounting department. Salaries expense - engineering
department.

3. Rent expense – Rent expense is the cost incurred by a business to utilize

property or location for an office, retail space, factory, or storage space. Rent
expense is a fixed operating cost or an absorption cost for a business, as
opposed to a variable expense.

4. Utilities expense – Utilities expense is the account used to record the cost of
expenses such as water, natural gas, electricity, and sewage. These expenses
are necessary for running the business and are variable costs that change based
on consumption.