STRATEGIC COST MANAGEMENT

STRATEGY AND
MASTER BUDGET
GROUP 1
EXPECTED LEARNING
OUTCOMES
After studying this chapter, you should be able
to...
1. Explain what a budget is and its role in the
management process
2. Determine the types of budget
3. Describe the importance of strategy in
budgeting and its relationship to the strategic
long-term and short-term goals of the firm
4. Explain the management process of
preparing the master budget
TOPICS TO BE
DISCUSSED
ROLE OF BUDGET

IMPORTANCE OF BUDGETING

- Formulation Strategy

- Strategic Goals and Long Term Objective - Long Range Planning

- Short Term Objectives and the Master Budget

THE MANAGEMENT PROCESS OF PREPARING THE MASTER

BUDGET

- Top Management Involvement

- Organization for Budget Preparation

- Budget Guidelines

- The Budget Period

- The Initial Budget Proposal

- Budget Negotiation, Review and Approval, Revision

THE MASTER BUDGET

- Steps in Developing a Master Budget

WHAT IS A BUDGET?
 ROLE OF BUDGET
A budget is a financial plan of the A budget plays an important role in
resources needed to carry out allocating resources, coordinating
tasks and meet financial goals; a operations, identifying constraints
quantitative expression of the and limitations, and communicating
goals the organization wishes to expected actions and results,
authorizing activities, motivating
achieve and the cost of attaining
and guiding implementation,
these goals.
providing guidelines for control of
operations, managing cash flows,
and serving as criteria in
performance evaluations.
 FORMULATION
OF STRATEGY
The process of determining a company’s strategy starts with the assessment of external
factors that affect operation and evaluating internal factors that can be its strength and
weakness.

External factors typically include

Competition
Technical, economic political, regulatory, social and environmental factor

Internal factors on the other hand , include operating characteristics such as:

Financial strength
Managerial talent and expertise
Functional structure
Organizational culture
COMPETITION

Competition influence refers to the impact of competition in the business environment. The impact
can come from changes in price, product, or business strategy. For example, if a company selling
similar products at a similar price to your business suddenly drops its price to attract more
customers, you may have to reduce the price as well or risk losing customers.
TECHNOLOGICAL FACTOR
Technology is used extensively in modern business, from production to product selling and customer
support. Technology allows a company to save time and labour costs while achieving more
efficiency, which, in the long run, can result in a competitive advantage. Three key areas of
technology in business are automation, e-commerce, and digital media.
ECONOMIC FACTOR
Businesses and the economy have a mutual relationship. The success of businesses results in a
healthier economy, whereas a strong economy allows businesses to grow faster. Thus, any changes
in the economy will have a significant impact on business development.
Economic activities can deeply be affected by changes in:
Tax rates
Unemployment
Interest rates
Inflation.
POLITICAL
Political influence on business refers to new legislation that affects consumers', employees, and
businesses' rights.
Generally, these are grouped into three categories:
Consumer laws - These are laws that ensure businesses will provide consumers with quality
goods and services.
Employment laws - These are laws that protect employee rights and regulate the relationship
between employees and consumers.
Intellectual property law - These are laws that protect creative work within the business world,
e.g. copyrights of music, books, films, and software.
SOCIAL
Social factors affecting business refer to changes in consumer tastes, behaviour, or attitude that
might affect business sales and revenues. For example, nowadays, consumers are paying more
attention to environmental issue such as climate change so this puts pressure on firm to adapt
products that will satisfy its customers.
ENVIRONMENTAL
Environmental influence refers to changes in the natural world, such as weather conditions, that might affect
business operations.
 INTERNAL FACTORS
FINANCIAL STRENGTH
A company’s financial health and access to financial resources directly impact its ability to grow and
respond to market challenges.
MANAGERIAL TALENT AND EXPERTISE
The leadership style and management practices of a company can directly impact its success.
Effective management involves setting clear goals, assigning responsibilities, monitoring progress
and implementing remedial actions when needed. Companies with strong management teams are
more likely to achieve their goals and objectives, resulting in increased profitability and growth.
ORGANIZATIONAL STRUCTURE
A healthy and positive organizational culture encourages employees to perform at their best. A
positive culture fosters teamwork, collaboration, and employee engagement, which ultimately lead to
improved performance and increased productivity.
FUNCTIONAL STRUCTURE
A functional structure is a type of business structure that organizes a company into different
departments based on areas of expertise. These departments serve as functional units and are
overseen by functional managers or department heads.Dec
FORMULATION
OF STRATEGY
Matching the firm’s strengths with its
identified opportunities, resources and
threats enables it to form its strategy.

Having analyzed external factors surrounding

the organization and assessed the internal
situations it is in, management can match
opportunities with strength and competitive
advantages of the firm and determine its
strategies and long-term opportunities
STRATEGIC GOALS AND
LONG TERM OBJECTIVES
-It is presented through capital budget and master budgets.

-strategy provides the framework within which a long range plan is developed.

LONG-RANGE PLANNING
-identifies required actions over a 5-to 10-year period to attain the firms
strategic goals.

-often entails capital budgeting, which is a process for evaluating, selecting

and financing major projects such us purchase of new equipment, construction
of new factory and addition of new products.

-capital budget are presented to bring the firm's capacity into line with the
needs of its long term plan.
DISBURSED
BUDGET
A disbursed budget refers to the portion of a
financial plan that has been allocated and
spent or distributed for specific purposes or
expenses.

It represents the actual funds that have been

utilized or disbursed from the total budget
allocation.
SHORT TERM
OBJECTIVES AND
MASTER BUDGET
 SHORT TERM OBJECTIVES AND
MASTER BUDGET

Short-term objectives are goals for the coming period, which

can be a month, a quarter, a year, or any length of time desired
by the organization for planning purposes.

A firm determines short-term objectives for the budget period

based on strategic goals, long-term objectives and plans,
operating results of past periods, and expected future operating
and environmental factors including economic, industry and
marketing conditions.
 SHORT TERM OBJECTIVES AND
MASTER BUDGET
EXAMPLE OF SHORT TERM OBJECTIVES IN AN
ORGANIZATION
Increase monthly sales compared to the previous quarter.
(Sales and Marketing)
Reduce production costs by optimizing supply chain
processes. (Operation)
Increase cash flow by improving accounts receivable turnover
in the next four months. (Finance)
Decrease average response time for customer inquiries for a
shorter hours within three months. (Human Resources)
Figure 5.2
presents the
relationship
between
strategic
goals, long-
term
objectives and
plan, short-
term goals,
budget,
operations and
control.
 Relationships and Flows
Strategic Goals → Long-Term Objectives and Plans

Long-Term Objectives and Long Term Plans → Short-Term

Goals

Short-Term Goals → Budget

Budget → Operations

Operations → Control
 Relationships and Flows
In summary, strategic goals guide the setting of long-
term objectives and plans, which then inform the
establishment of short-term goals and budget
allocations. Operations are conducted within this
framework, and control mechanisms ensure that
activities are aligned with objectives and plans,
enabling adjustments as required to achieve
organizational goals.
THE MANAGEMENT
PROCESS OF
PREPARING THE
MASTER BUDGET
 THE MANAGEMENT PROCESS
OF PREPARING THE
MASTER BUDGET
Top management involvement
Organization for Budget Preparation

Budget Guidelines

The Budget Period

The Initial Budget Proposal

Budget, Negotiation and Approval, Revision

 TOP MANAGEMENT INVOLVEMENT

Top management needs to be involved and show strong

interest in budget results.

Too much involvement, however, may make the budget and

alienate lower managers.

The right answer is a good balance of top management

involvement with lower-level managers.
 TOP MANAGEMENT INVOLVEMENT

Budgeting processes usually include formation of a

budget committee;
determination of the budget guidelines;
preparation of the initial budget proposal;
budget negotiation, review and approval;
and budget revision.
 ORGANIZATION FOR BUDGET
PREPARATION

Budget committee- representation from the different

functional areas with controller to serve as the head of the
committee.

A budget committee with representation from the different

functional areas (marketing, production, finance, and
administration) is generally considered an effective body to
oversee preparation and administration of the budget.
 ORGANIZATION FOR BUDGET
PREPARATION

The controller may be selected to serve as head of the

committee for two major reasons:

(1) Controller's position is independent from the

operating parts of the organization.

(2) He has the skills and experiences in coping with the

intricacies of setting up a budget.
 BUDGET
CONTROLLER COMMITTEE

acts as a coordinator in the decides how budgets shall be

budgeting operation. prepared, passes on the final
He recommends how budgets budget and settles disputes in one
should be prepared, assembles the segment of the business and
budgets, prepares showing another when differences of opinion
variances of the actual results from arise.
the budgeted results, interprets
variances and offers suggestions for
improvement whenever possible.
BUDGET
GUIDELINES
BUDGET
GUIDELINES
One of the responsibilities of the budget committee is to
provide initial budget guidelines that set the tone for the
budget and govern budget preparation. All
responsibility centers (or budget units follow the initial
budget guidelines in preparing their budgets.
BUDGET
GUIDELINES
Starting point: Firm's strategy
Consideration of Developments
Economic Outlook and Market Conditions
Organizational Goals for the Budgeting Period
Corporate Policies and Mandates
Review of Year-to-Date Operating Results
THE
BUDGET
PERIOD
THE BUDGET
PERIOD

As a general rule, the period covered by a budget

should be long enough to show the effect of
managerial policies but short enough so that
estimates can be made with reasonable accuracy.
T
Y MASTER BUDGET
P
E It is an overall financial and operating plan for a coming fiscal period and the
coordinated program for achieving the plan. It is usually prepared on a quarterly or
S
an annual basis

O
F CAPITAL BUDGETS
Long range budgets called capital budgets, which incorporate plans for major
B expenditures for plant and equipment or the addition of product lines, might be
U prepared to cover plans for as long as 5 to 10 years.
D
G
E RESPONSIBILITY BUDGET
T segments of the master budget relating to the aspect of the business that is the
I responsibility of a particular manager are often prepared monthly. It enable
N managers to track their specific areas of responsibility.
G
T
Y
P Cash Budget
E
Cash budgets focus on the organization's cash flow.
S

O
F Continuous budgets
B a one-year budget continuously prepared every month
U by adding another month once the current month has
D passed.
G
E
T
I
N
G
THE INITIAL
BUDGET PROPOSAL

INTERNAL FACTORS: EXTERNAL FACTORS:

Introduction of new products. Competitor's actions.

Adoption of new manufacturing processes. Changes in the labor market.
Changes in availability of equipment or Availability of raw materials or components
facilities. and their prices.
Changes in product design or product mix. Industry's outlook for the near term.
Changes in expectations or operating
processes of other budget units thr the
budget unit relies on for its input materials or
other operating factors.
Changes in other operating factors or in the
expectations or operating processes in
those other budget units that rely on the
budget unit to supply them components.
BUDGET NEGOTIATION, REVIEW
AND APPROVAL, REVISION

Head of the Budget units shall examine the

initial budget proposal if it is within the
budgetguidelines and reasonably attainable.
Negotiation occurs at all level of organization.
Budget committee reviews the budget
CEO approves the budget and submit to BODs
THE MASTER
BUDGET
 THE MASTER BUDGET
A master budget is a comprehensive financial planning
document that includes all the lower-level budgets, cash
flow forecasts, budgeted financial statements, and
financial plans of an organization.
It's usually developed by a firm's budget committee and
guided by the budget director.
A master budget usually incorporates many elements,
which may include the budgets for sales, production,
administration, direct materials, labor, and overhead
FIGURE 5-3
DELINEATES THE
RELATIONSHIPS
AMONG
COMPONENTS
OF A MASTER
BUDGET.

FIGURE 5-3: THE

MASTER BUDGET
STEPS IN DEVELOPING A
MASTER BUDGET
Establish basic goals and long-range plans (serve as guidelines).
Prepare a sales forecast for the budget period.
Estimate the cost of sales and operating expenses.
Determine the effect of budgeted operating results on assets,
liabilities, and equity accounts. Cash budget is prepared in this step.
Summarize the estimated data in the form of projected reports
(income statement, financial position, and cash flows)
 THANK YOU

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