## **Learning Outcomes**

After reading this article, you will understand how to prepare a comprehensive budget, including both the statement of profit or loss (SPL) and statement of financial position (SFP). You will be able to link functional budgets, construct complete comprehensive budgets, and apply scenario planning to account for uncertainty. You will also be able to interpret and adjust budgets using ‘what if’ and scenario analysis to support better planning and decision-making.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand comprehensive budget preparation and scenario planning as part of budgeting and planning for organisational control. This article covers:

- The construction and combination of sales, production, and functional budgets into a comprehensive budget
- Preparation of the statement of profit or loss (SPL) and statement of financial position (SFP) within the budgeting framework
- Identification and use of principal budget factors
- Explanation and application of ‘what-if’ analysis and scenario planning in budget preparation
- Understanding the impact of changes in cost/revenue drivers and the wider economic environment on budget figures
- Assessing and adjusting for uncertainty and sensitivity in budgeted results

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the primary difference between a comprehensive budget and a functional budget?
2. When preparing a comprehensive budget, which budget is typically prepared first, and why?
3. A company wants to assess how a 10% fall in sales volume would impact its cash and profit. What budgetary tool should be used?
4. Give one potential limitation of relying only on a single set of budgeted figures for decision making.

## **Introduction**

Comprehensive budget preparation is central to organisational planning and control. The comprehensive budget brings together all functional budgets, synthesising the plans and targets of each business area into an overall financial blueprint. This includes the budgeted statement of profit or loss (SPL), the statement of financial position (SFP), and often a cash budget.

Scenario planning and ‘what if’ analysis allow management to test how changes in assumptions or external factors would affect the budgeted results. This improves risk management by providing options for uncertain or volatile business environments. Solid comprehensive budget skills, including SPL and SFP preparation and scenario analysis, are essential for ACCA candidates and working accountants alike.

## **THE COMPREHENSIVE BUDGET: STRUCTURE AND PURPOSE**

The comprehensive budget is the comprehensive summary plan for an accounting period. It typically has three main output statements:

- The budgeted statement of profit or loss (SPL)
- The budgeted statement of financial position (SFP)
- The cash budget

It results from integrating all individual functional budgets—sales, production, purchasing, labour, overheads, and administrative costs.

> **Key Term: comprehensive budget**
> A complete set of budgeted financial statements, usually including the SPL, SFP, and cash flow, derived from all functional budgets for a period.

Functional budgets (such as sales, production, and procurement budgets) provide the detailed estimates that feed into the comprehensive budget. The process requires tight coordination among departments and clear identification of the principal budget factor.

> **Key Term: principal budget factor**
> The item that most restricts output or activity in the budget period, such as sales demand, production capacity, or supply constraints.

## **PREPARING THE COMPREHENSIVE BUDGET: STEP-BY-STEP**

### 1. Identifying the Principal Budget Factor

The first step is to identify what will constrain activity in the period. Most often, this is sales demand, but it could be limited by machine hours, labour, or raw materials. The budget associated with this limiting factor must be completed before other budgets.

### 2. Preparing the Sales Budget

The sales budget estimates expected unit sales and revenue per product by period. All subsequent budgets (production, purchases, and so on) usually depend on the sales figures.

### 3. Preparing Functional Budgets

Functional budgets are next, each informed by the sales or activity budget:

- Production budget: Calculation of units to manufacture, adjusted for inventory changes.
- Raw materials usage and purchases budgets: How much raw material is needed, considering desired closing stock.
- Labour budget: Hours and cost required to meet production targets.
- Overhead budgets: Estimates of variable and fixed overheads.
- Administrative and selling expense budgets: Planned non-production costs.

### 4. Preparing the Cash Budget

The cash budget forecasts cash inflows and outflows based on the sales and purchasing/payment schedules.

### 5. Compiling the Statement of Profit or Loss (SPL) and Statement of Financial Position (SFP)

The SPL summarises expected revenues and all expenses, leading to the projected profit or loss for the period.

The SFP consolidates period-end balances for all assets, liabilities, and equity. It reflects the results of all other budgets and reveals expected financial position at period end.

> **Key Term: statement of profit or loss (SPL)**
> A summary of projected revenues, costs, and profits for a period, based on budgeted data.
>
> **Key Term: statement of financial position (SFP)**
> A predicted end-of-period balance sheet showing assets, liabilities, and equity from budgeted activity.

### **Worked Example 1.1**

A manufacturer budgets to sell 10,000 units at \$20 per unit. Opening finished goods inventory is 2,000 units; closing inventory should be 1,500 units. What is the production budget?

> **Answer:**
> Budgeted sales: 10,000 units  
> Add closing inventory: 1,500 units  
> Less opening inventory: 2,000 units  
> Budgeted production: 9,500 units

### **Worked Example 1.2**

Given the following budgeted cost information:

- Direct materials: \$5 per unit
- Direct labour: \$3 per unit
- Variable overhead: \$2 per unit
- Fixed overhead: \$1 per unit
- Units produced: 9,500  
  What is the cost of goods sold in the SPL if opening inventory is 2,000 units, closing inventory is 1,500 units, and all inventory is valued at full cost?

> **Answer:**
> Cost per unit: \$5 + \$3 + \$2 + \$1 = \$11  
> Opening inventory: 2,000 × \$11 = \$22,000  
> Production: 9,500 × \$11 = \$104,500  
> Goods available: \$126,500  
> Less closing inventory: 1,500 × \$11 = \$16,500  
> Cost of goods sold: \$110,000

### **Exam Warning – Inventory Valuation**

> Be careful to match inventory valuation methods—use the same basis (marginal or absorption costing) when preparing closing balances for the SPL and SFP.

## **SCENARIO PLANNING AND ‘WHAT IF’ ANALYSIS**

Scenario planning is the systematic process of evaluating the budget under different possible future conditions. ‘What if’ analysis is a related process, testing how changes in key assumptions—like sales price, volume, or costs—affect outcomes.

> **Key Term: scenario planning**
> The practice of preparing budgets under alternative sets of assumptions to assess the effect of uncertainty and help plan responses to possible future events.

Managers use scenario planning to test sensitivities in the comprehensive budget. This can expose risks, inform contingency plans, and build confidence in the robustness of the budget.

Common applications include:

- Testing impact of a percentage change in sales volumes or prices
- Assessing effects of raw material price increases
- Considering exchange rate volatility for international transactions
- Modelling changes in the timing of cash inflows and outflows

### **Worked Example 1.3**

A company’s comprehensive budget projects sales of 20,000 units at \$50 each and expects to break even. Management is concerned about a possible 15% fall in sales. How would this affect profitability?

> **Answer:**
> Revised sales: 20,000 × 85% = 17,000 units  
> Calculate new total revenue and revise expenses accordingly in the SPL. If fixed costs are unchanged, lower sales volume may reveal a loss, or smaller profit, depending on contribution margins.

### **Exam Warning – Scenario Analysis**

> Always change both revenues and all variable costs appropriately when adjusting sales volumes in ‘what if’ or scenario analysis.

### **Revision Tip**

> When preparing alternative scenarios, ensure to document all changed assumptions clearly. Use spreadsheets for rapid recalculation but check your revised budget logic carefully.

## **PRESENTING AND INTERPRETING THE COMPREHENSIVE BUDGET**

Once prepared, the comprehensive budget offers a complete financial snapshot of the planned period:

- The SPL shows forecast revenues and profits.
- The SFP displays expected asset, liability, and equity positions.
- The cash budget predicts cash surpluses or shortfalls for funding or investment decisions.

Budget holders compare actual results against comprehensive budget figures to identify performance gaps and take corrective action throughout the period.

## **LIMITATIONS AND BEST PRACTICE IN COMPREHENSIVE BUDGETING**

Budgeting is powerful but has limitations:

- Budgets are based on forecasts, not certainties; all numbers are subject to error and estimation.
- Focusing on a single-budget view can lead to planning complacency and lack of readiness for change.
- Scenario planning and sensitivity analysis should not only be performed once, but regularly, responding to changing business conditions.

Best practice:

- Use scenario and ‘what if’ analysis to build a resilient budget and prepare appropriate contingency plans.
- Involve relevant managers in budget preparation to increase commitment and awareness.
- Update and review assumptions routinely, especially when environment change is likely.

## **Summary**

A comprehensive budget integrates the results of all individual budgets, resulting in a forecast SPL, SFP, and cash budget. Scenario planning and ‘what if’ analysis improve budget relevance by allowing management to anticipate and prepare for uncertainty. Exam success depends on clear understanding of each step, correct combination of figures, and ability to test assumptions systematically.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The purpose and structure of the comprehensive budget, including SPL and SFP
- Steps to prepare a comprehensive budget from functional budgets
- Identification and treatment of the principal budget factor
- The procedures for compiling the SPL and SFP within the comprehensive budget
- The roles of scenario planning and ‘what if’ analysis for dealing with uncertainty
- Presenting, interpreting, and adjusting the comprehensive budget based on changing assumptions

## **Key Terms and Concepts**

- comprehensive budget
- principal budget factor
- statement of profit or loss (SPL)
- statement of financial position (SFP)
- scenario planning

Budget preparation - Comprehensive budget (SPL and SFP) and scenario planning