LIMITATIONS (PROBLEMS) ASSOCIATED WITH BUDGETING

1. Accuracy of estimates.
2. Adverse reactions from employees.
3. Amount of work involved in developing a good budget.
4. Once the budget is developed, it limits flexibility.
5. It is an expensive tool and implementation is not automatic.

FACTORS FOR DETERMINING BUDGET PERIOD

1. Nature of demand for the product.

2. The length of the trade cycle.
3. The production cycle.
4. The functional areas covered by the budget.
5. The need for the control of operations.
6. The time interval necessary for financing production well in advance of actual needs.
7. The accounting periods.

STEPS IN FORMULATING A MASTER BUDGET

1. Develop a Sales forecast. A sales forecast is the starting point (normally) because sales are the
limiting factor.
2. Prepare a Production budget based on the sales forecast.
3. Prepare a schedule of Material usage and purchase.
4. Prepare a schedule of Direct labor costs, based on production level, estimated labor rates and
labor methods.
5. Prepare a schedule of Manufacturing overhead costs that usually consists of the fixed and
variable sections.
6. Prepare a schedule of desired Ending inventory levels.
7. Prepare a schedule of Cost of goods sold using data from 3-6.
8. Prepare a schedule of Selling, administrative and other expenses.
9. Prepare a budgeted Income statement based on the above data.
10. Prepare a Cash budget n a month-to-month or quarter-to-quarter basis.
11. Organized the above data into a budgeted Balance sheet and Statement of cash flows.
12. Prepare a Capital expenditure budget.

SUB-PARTS OF MASTER BUDGET

A. OPERATIONG BUDGET
1. Sales forecast
2. Production budget
a. Material purchase and usage
b. Direct labor costs
c. Factory overhead costs
d. Inventory levels
3. Cost of goods sold budget
4. Selling and administrative expense budget
 5. Other expense related budgets
B. FINANCIAL BUDGET
1. Cash forecast
a. Cash receipts
b. Cash disbursement
2. Budgeted income statement
3. Budgeted balance sheet
4. Budgeted statement of cash flows
C. SPECIAL BUDGET
1. Performance budgets
2. Capital budgets

BUDGET MANUAL (COMPOSITION)

1. Objectives and policies of the enterprise

2. Definition of line of authority and responsibility
3. Functions and responsibilities of the budget committee and the budget officer
4. Time schedules for budget preparation
5. Instructions and forms to be used.
6. Program for the preparation of budgets.
7. Procedures to obtaining approval.
8. Form, nature and responsibility for the preparation of the budget.
9. Procedures for budgetary control and account codes in use.

FIXED AND FLEXIBLE BUDGETS

1. Fixed budget - it is a budget based on one level of activity. An example of a fixed budget would
include operating budgets from the master budget plan.
2. Flexible budget - it is a budget based on different levels of activity. It is an extremely useful tool
for comparing the actual cost incurred to the cost allowable for the activity level achieved.

PURPOSES OF FLEXIBLE BUDGETING

1. Planning of overhead costs.

2. Controlling costs by periodic reporting.
3. Special analysis in the decision-making.
4. Actual and budgeted results can be compared at virtually any level of activity.

SAMPLE MASTER FIXED BUDGET

Sales Volume (units) __30,000__

Sales at P20 P600,000
Variable Manufacturing Costs:
Materials at P2 P 60,000
Labor at P4 120,000
Overhead at P2 __60,000_ __240,000__
Contribution Margin (Manufacturing) P360,000
Variable selling and administrative at P4 __120,000__
Contribution Margin (Final) P240,000
Fixed Costs:
Manufacturing P 70,000
Selling and administrative __50,000__ __120,000__
Net Income P120,000

Short-term Budgeting
b. Budgeted production x
Standard materials per unit _x_
Budgeted materials needs x
Add: Mats invty - ending _x_
Materials available for use x
Less: Mats invnty – beginning _x_
Budgeted mats purchases (units) x
x Standard mats cost per unit _Px_
Budgeted mats purchases in pesos Px

c. Budgeted production x
x Standard DLH per unit _x_hrs.
Budgeted DLH x
x Standard DL rate per hour _Px_
Budgeted DL Cost Px

Mat Inv-beg - Mat Purch Total mats

Mat Inv-end + Mat Used Total mats
Total materials Total materials
MiBeg . MPurch - MIEnd + MUsed
MPurch - MIE + MU - MIB

d. Budgeted variable overhead (Budgeted Production x Standard VOH Rate) Px

Budgeted fixed overhead (Normal Capacity x Standard FOH Rate) PX _x_
Budgeted factory overhead Px

Standard VOH Rate (Budgeted Variable OH/Budgeted Capacity) Px

Standard Fixed Rate (Budgeted Fixed Overhead / Normal Capacity) _x_
Standard OH Rate Px

(Take note of the use of normal capacity in determining the budgeted fixed overhead!!!)

e. The following are the content analysis of the following expense and income accounts

_______Accrued Expenses_______ _______ Prepaid Expenses_______

PAID x Beg Bal x Beg Bal x INCURRED x
Ending Bal x INCURRED x PAID x Ending Bal x

Therefore
 AEBeg + Incurred = Paid + AEEnd PEBeg + Paid = Incurred + PEEnd Incurred = AEE
+P-AEB Incurred = PEB+P - PEE
Paid = AEB + I-P Paid = PEB+ I – PEB

________Accrued Income_________ _______ Prepaid Income_______

Beg Bal x RECEIVED x EARNED x Beg Bal x
EARNED x Ending Bal x Ending Bal x RECEIVED x

Therefore
ARBeg + Earned = Received + AlEnd PlBeg + Received = Earned + PIBeg
Earned = AIE +R-AIB Earned = PIB +R-PIE

Received = AIB + E-AIE Received = PIE + E – PIB

f. Cash Balance = The following are the three (3) standard formats in computing the cash
balance at the end:
1. Cash balance – beginning Px
Add: Receipts _x_
Total cash available for use x
Less: Payments _x_
Cash balance – ending Px

2. Cash inflows Px
Cash outflows _(x)_
Net cash inflows (outflows) x
Add: Cash bal – beginning _x_
Cash balance – ending Px

3. Operating activities:
Cash inflows Px
Cash outflows _(x)_ Px
Financial activities:
Cash inflows x
Cash outflows _x_
Investing activities: x
Cash inflows x
Cash outflows _x_ _x_
Net cash inflows (outflows) x
Add: Cash bal-beg _x_
Cash bal-endng Px