Budgeting Methodologies

Midterm Topic 2
Ann Christine C. Chua, CPA, CMA (U.S.)
Budgeting Methodologies

• Finite amount of resources

• Allocation of scarce
resources among competing
opportunities is accomplished
through IMPLEMENTATION
of STRATEGY
MASTER BUDGET

An overall plan/annual
business plan/annual profit
plan based on a company’s
strategy for controlling its
operations for a specific
period of time
 STEPS IN FORMING MASTER BUDGET

ANALYZE THE INTERNAL FORM STRATEGIC CREATE LONG-TERM CREATE SHORT-TERM CREATE MASTER
AND EXTERNAL GOALS PLANS PLANS BUDGET
ENVIRONMENT
FINANCIAL BUDGET
Types of Budgets

Annual/Master Budget
• Comprehensive budget for a
year or less to show every
aspect of the company’s
revenue and cost flows to
produce proforma financial
information
Types of Budgets

Continuous/Rolling Budget
• adds a new period onto the
budget at the end of each
period so there are always
several periods planned for the
future and the budgets remain
up to date with the operating
environment
Types of Budgets
• A continuous rolling budget,
sometimes simply called a
rolling budget, is used to
establish and maintain a
constant number of operating
periods moving forward in the
master budget.

with January operations for Year 1 (Y1)

completed, the organization has rolled
forward the budget plan to build the
monthly budget for January in Year 2 (Y2).
Types of Budgets
• Flexible budgets are used to
examine possible future
scenarios in sales volume.

• Flexible budgets are crucial

for computing variances to
evaluate past operating
results based on relevant
costs.
• Flexible budgets are
used to examine
possible future
scenarios in sales
volume.
• The company is
tracking variable
costs as a rate per
boat, but managing
fixed costs in total.
• Rolling budgets and
flexible budgets are
specific types of tools in
the master budget plan.
• At a more conceptual
level, organizations also
make important
management choices
about the particular
methodology used in the
budgeting process.
• Activity-based
budgeting is a detailed
budget methodology that
results in a more
sophisticated and detailed
view of the many activities
that drive costs in most
organizations.
• Traditional budget
methodologies follow a fairly
simple cost allocation
approach that groups costs
by departments and then
allocates costs based on unit
measures such as direct
labor hours, headcount, or
square feet of space.

• Conversely, activity-based
budgeting methods focus
on identifying and using core
activities throughout the
organization to establish
activity cost rates in order to
assign costs to products,
customers, and other
business targets based on
actual consumption
relationships
• Activity-based budgeting
methodologies generally provide
much more accurate cost
planning, control, and evaluation
results for management use.

• Activity-based budgeting methods

are better focused on identifying
and supporting value-added
processes in the organization.
• The improvement in the accuracy
of cost measurement and better
focus on value-added processes
is a major incentive for
organizations to pursue activity-
based budgeting methods
• Zero-based budgeting
takes a very
structured approach
to regularly (e.g.,
annually) demand that
all budgeting choices
(spending, processes,
priorities, etc.) are
taken back to a “blank
page” to be fully
evaluated and, if
approved, put into the
master budget plan.
• The zero-based methodology
was originally developed for
government organizations to
help discipline what was
perceived to be runaway
spending.
• For organizations willing to
invest in the rigor, zero-based
budgeting methodology
continues to be useful for
organizations that need
significant discipline to focus
back on strategy and to reduce
inefficient spending.
• Project budgets generally
represent strategy-focused
investments made by the
organization to strengthen or
shift its competitive position.

• Like the operational budget,

project budgets can use any of
the budgeting tools and
methodologies