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Budgeting
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Concepts
A n t o n i o E r i b e r t o C . C a b u g , C PA , C M A , M B A

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Budgeting
Introduction

A plan expressed in quantitative

terms.

“an estimation of revenue and

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expenses over a specified future

period of time and is usually
compiled and re-evaluated on a
periodic basis.”

“Budgets can be made for a person, a

M group of people, a business, a
government, or just about anything
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Reasons to
budget?
Why budget?

• Planning
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• Communication &
Coordination

• Monitoring

• Performance Evaluation
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Budget
Classifications
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Approaches to Budgeting
Top-down approach
• Also known as authoritative
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approach.
• Top management decides on the
budget. When finalized, such will be
cascaded to the lower managers.
• Faster, cheaper
• Ensures that the budget is consistent
with the strategic plan.
• Lower managers are likely to be
M hesitant in accepting the budget.
Bottom-up Approach
• Also knowns as participative
approach.
• The budget is prepared with input
from lower managers, although
finalized by top management.
• Time consuming and expensive.
• More likely to “empower” lower
managers.
• Lower managers are likely to be more
committed as they are heard while the
budget is being prepared.
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Approaches to Budgeting

Zero-based budgeting Incremental Budgeting

• A budget prepared from scratch. • Start with the prior year. Adjust for
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• No reference to prior year budget nor incremental changes.

actual results • Easy and fast to prepare
• Each activity should be justified • Less expensive
through cost-benefit analysis.
• Very expensive and time consuming

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Approaches to Budgeting

Static Budget Flexible Budget

• A budget prepared only for one level • A budget that can be adjusted for
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of activity (i.e. the master budget) changes in activity

Sales units Sales units 15K u

12K u
10,000 u 10K u P150K
P120K
Revenue P100,000 Revenue P100K
(98K)
Expenses (90,000) Expenses (90K) (110K)
P 22K
Profit P 10,000 Profit P 10K P 40K

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Variable Costs (178,750 / 55k) 3.25

Fixed Costs (108,000 / 60k) 1.80
Cost per unit 5.05
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(86.67 x 70) 6,067

(43.33 x 70) 3,033
1,200
1,700
4,600
16,600
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The rolling (continuous) budget

• It is a budget that is
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continuously updated on a
monthly or quarterly basis.
• When one month/quarter
passes, another month/quarter
is added to the budget Q1 Q2 Q3 Q4
xxx xxx xxx xxx
xxx xxx xxx xxx

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The rolling (continuous) budget

• It is a budget that is
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continuously updated on a
monthly or quarterly basis.
• When one month/quarter
passes, another month/quarter
is added to the budget Q1 Q2 Q3 Q4 Q1 Q2
xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx xxx

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Activity-based
budgeting (ABB)
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• a method of budgeting where • more rigorous than traditional

activities that incur costs are budgeting processes, which
recorded, analyzed and tend to merely adjust previous
budgets to account for inflation
researched.
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Project Budget

• The Project Budget • A project budget

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is a tool used by template includes a

project managers to detailed estimate of
estimate the total all costs that are
cost of a project. likely to be incurred
before the project is
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