THE

MASTER
BUDGET
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 The Master Budget
• A comprehensive budget for a specific period.
It consists of many interrelated operating and
financial budgets. Some firms refer to the
process of preparing a master budget as profit
planning or targeting.
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 Steps in Developing a Master Budget
1. Establish basic goals and long-range plans for the company. These will
serve as guidelines in the preparation of budget estimates.
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of sales and operating expenses.
4. Determine the effect of budgeted operating results on assets, liabilities and
ownership equity accounts. The cash budget is the largest part of this part
of this step, since changes in many asset and liability accounts will depend
upon the cash flow forecast.
5. Summarize the estimated data in the form of a projected income statement
for the budget period, the projected statement of financial position as of
the end of the budget period and projected cash flow statement.
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 Additional Information
The treasurer’s office also provided the following information and estimates:
1. All sales are on account and collections from customers are expected to amount to
P5,185,000.
2. Equipment costing P300,000 with accumulated depreciation of P275,000 will be sold at its
net book value. New equipment costing P320,000 will be purchased during the year.
3. Accounts payable will increase by P15,000 and assumed to be for materials purchases
only.
4. Income taxes will be provided at an average rate of 35% of income before taxes while
P252,000 will be paid during the year.
5. Dividends amounting to P140,000 will be paid during the year and the current portion of
long-term debt shall also be settled at the end of the year. Interest rate is 8% per annum.
REQUIRED: Prepare the Master Budget for Gilbert Company for the year ending December
31, 2020.
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 Sales Budget
● The sales budget showing what products will be sold in what
quantities at what prices, is the foundation on which all other short-
term budgets are built. The sales budget triggers a chain reaction
that leads to the development of many other budget figures in an
organization. The sales budget provides the revenue predictions
from which cash receipts from customers can be estimated and
supplies the basic data for constructing budgets for production
costs and selling and administrative expenses. In short, the sales
forecast is the keystone of the budget structure. The accuracy and
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reasonableness of the sales data will affect the whole budget.

 The sales forecast is made after consideration of the following factors.

1. Past sales volume

2. General economic and industry conditions
3. Relationship of sales to economic indicators
4. Relative product profitability
5. Market research studies and competition
6. Pricing, advertising and other promotion policies
7. Production capacity
8. Quality of sales force
9. Seasonal variations
10.Long-term sales trends for various products
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 Schedule 1
Gilbert Company
Sales Budget
For the Year 2020

Production Budget
• After the sales budget has been set, a decision can be made on the
level of production that will be needed for the period to support sales
and the production budget can be set as well. It becomes a key factor
in the determination of other budgets, including direct materials
budget, direct labor budget and the manufacturing overhead budget.
These budgets in turn are needed to assist in formulating a cash
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budget.
 Schedule 2
Gilbert Company
Production Budget
For the Year 2020

Units to be sold 6,400

Add: Desired ending inventory 1,000
Total 7,400
Less: Beginning inventory 900
Units to be produced 6,500

Raw Materials Budget

• After determining the number of units to be produced, the
Raw Materials Purchases can now be prepared, as follows:
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 Schedule 3
Gilbert Company
Raw Materials Purchases
For the Year 2020
Units required for production R S
R (6,500 x 3) 19,500
S (6,500 x 5) 32,500
Add: desired ending inventory 1,300 1,300
Total units required 20,800 4,600
Less: Beginning inventory 2,200 33,100
Units to be purchased 18,600 18,600
Unit price X P10 X P30
Total Purchases P186,000 P993,000
Direct Labor Budget
• The preliminary data shows that the budgeted direct labor cost
per unit is P146. This must have been arrived at after considering
such factors as skills level of the workers, labor rate per hour, time
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requirement, conditions of union contracts, etc.

 Schedule 4
Gilbert Company
Budgeted Direct Labor
For the Year 2020

Number of units to be produced 6,500

Multiply by: Direct labor cost per unit P 146
Total Budgeted Direct Labor Cost P949,000

Overhead Costs Budget

• Study of past records will show how the cost reacts to
changes in volume or in relation to other factors. Some
overhead items may be projected on the basis of direct
labor hours or on materials costs or on machine hours .
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 Schedule 5
Gilbert Company
Budgeted Manufacturing Overhead
For the Year 2020

Variable Overhead: units needed to produce 6,500 units

Indirect materials and supplies P 38,000
Materials handling 59,000
Other direct labor 33,000
Total P 130,000
Fixed manufacturing overhead
Supervisor salary P 175,000
Maintenance & repairs 85,000
Plant ad ministration 173,000
Utilities 87,000
Depreciation 280,000
Insurance 43,000
Property taxes 117,000
Others 41,000
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Total P 1,001,000
Total Manufacturing Overhead P 1,131,000
 Budgeted Cost of Sales
• Can now be developed using the data from the following:

Production Budget Schedule 2

Raw Materials Budget Schedule 3
Direct Labor Budget Schedule 4
Overhead Cost Budget Schedule 5
Budgeted Statement of Cost of Sales Schedule 6
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 Schedule 6
Gilbert Company
Budgeted Statement of Cost of Sales
For the Year 2020
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 Marketing and Administrative Expense Budget
• As with overhead costs, marketing and
administrative expenses are also made up of fixed
and marketing variable components.
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 Schedule 7
Gilbert Company
Budgeted Marketing and Administrative Costs
For the Year 2020
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 Cash Budgets
• Cash receipts
Normally, the bulk of a firm’s cash receipts from the customers. The
possibility of cash from other sources (such as additional investments,
sales of assets, borrowings) should likewise be considered when cash
receipts are being budgeted.
• Cash disbursements
Data converted from individual budgets previously illustrated supply the
basic information for the cash disbursements budget.

Using the data collected in the various budgets and the information that
has been previously provided, the following CASH BUDGET
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STATEMENT is developed.
 Schedule 8
Gilbert Manufacturing Company
Cash Budget
For the Budget Year Ending, December 31, 2020
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 Budgeted Income Statement
• After the cash budget has been completed, the company
prepares the budgeted income statement showing net
income that is expected during the budget period.
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 Schedule 9
Gilbert Manufacturing Company
Budgeted Income Statement
For the Budget Year Ending, December 31, 2020
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 Budgeted Statement of Financial Position
• Developed by beginning with the current statement of
financial position and adjusting it for data contained in
the other budgets.
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 Schedule 10
Gilbert Manufacturing Company
Budgeted Statement of Financial Position
As of December 31, 2020
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 BUDGETING IN SERVICE INDUSTRIES
• A service organization achieves in budgeted goals and fulfills its mission
through providing services.
• Budgeting for service firms, similar to budgeting for manufacturing or
merchandising firms, plans for resources available from operation and the
required resources in operation to fulfill budgeted goals. The difference is
in the absence of products or merchandise purchase budget and their
ancillary budget.
• An important focal point in its budgeting is personal planning. A service
firm must ensure that it has personnel with the appropriate skills and
competence to perform the services required for the budgeted sales
revenue.
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 Budgeting in Not-For-Profit Organization
• A not-for-profit organization’s objective is to provide services efficiently
and effectively as mandated in its charter, while not spending more
than the allowed expenditure level.
• The objectives of not-for-profit organizations such as governments,
state universities or colleges, secondary and primary schools, charity,
organizations, museum, and foundations are different from those of for
profit organizations.

BUDGETING IN INTERNATIONAL SETTING

• Subsidiaries or subdivisions of a multinational firm often have their
own budgets. They must follow the firms budget procedures and
coordinates their budgets with other divisions of the firm.
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 ALTERNATIVE APPROACHES IN BUDGETING
Zero-Base Budgeting
• a budgeting process that requires managers to prepare budgets from a
zero base. A typical and traditional budgeting process is an incremental
process that starts with the current budget. The process assumes that most, if
not all, current activities and functions will continue into the budget period. The
primary focus in a typical budgeting process is on changes to the current
operating budgets.
Activity-Based Budgeting
• Activity based budgeting (ABB) is a budgeting process based on activities
and cost drivers of operations. ABB starts with the budgeted output and
segregates cost required for the budgeted output into homogenous activity
such as unit, batch, product sustaining activity cost pools based on
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similarity of their resource and activity consumption cost drivers.

 Kaizen (Continuous Improvement) Budgeting

• A budgeting approach that explicitly demands continuous improvement in

operation processes and incorporates the improvements in the budget. A firm
using kaizen budgeting prepares budgets based on the desired future
operating processes for the budget period.
• An improvement over the current operating processes, rather than the
continuation of the current practices as is the case of traditional budgeting.
• Begins by analyzing practices to identify areas for improvement and
determine expected changes needed to attain the desired improvement.
Budgets are prepared based on improved practices or produces.
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 ETHICAL ISSUES IN BUDGETING
• Include preventing concealment of information, avoidance of having a
higher budget goal, inclusion a budget slack, and spending the budget to
avoid having it cut back. Behavioral issues in budgeting encompass the
difficulty level of budget targets, the drawbacks and advantages of
authoritative and participate budgeting processes, the extent of
involvement of top management in budgeting, and the role of the budget
department or controller on budgeting.
• Ethical issues permeate all aspects of budgeting. A significant portion of
information used in budgeting is provided by people whose performance is
evaluated against the budget. Employees breach the code of ethics if they
deliberately furnish data for budgeting purposes that would lead to lower
performance expectations.
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• Spending the budget is another ethical issue in budgeting

 GOAL CONGRUENCE
• Consistency between the goals of the firms and the goals of its employees.
A perfect goal congruence is the ideal for which many firms strive,
Realistically, perfect goal congruence almost never exist because resources
for satisfying short term goals of an individuals are often in conflict with
those of the firm.
• A budget that aligns the goal of the firms with those of its employees has
much better chance of leading to successful operations. One approach that
encourages goal congruence is avoiding authoritative budgeting and using
participative budgeting as much as possible. An employee identifies a
budget as their own in participative budgeting the goals of the firms and
those of its employees become the same.
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 AUTHORITATIVE or PARTICIPATIVE BUDGETING
• Are either top down or bottom up. Authoritative budgeting in a top down
budgeting process top management prepares budget for the entire
organization, including those for lower level operations. A participative
budgeting process, is a bottom up approach that involves the people
affected by the budget, including lower level employees, in preparing the
budget. Authoritative budgeting provides better decision making control
than participative budgeting. Top management sets the overall goal for the
budget period and prepare the budget for operation to attain the goals. An
authoritative budget, however, often lacks commitment on the lower level
managers and workers responsible for the implementation of the budget.
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 Thank you!
TEAM 3

Senita, Annabel
Botiger, Alpie
De Castro, John
Domingo, Mary Jane
Matulac, Jerico
Osorio, Jackielyn
Santiago, Reymon
Segismar, Gil Yves
Tumblod, Rubylyn
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