05: BUDGETING

Budget – a financial plan of the resources needed to carry out tasks and meet financial
goals. It is also a quantitative expression of the goals the organization wishes
to achieve and the cost of attaining these goals.

Budgeting – the process of preparing a budget.

Control – involves steps taken by management to ensure that the objectives set down at
the planning stage are attained and to ensure that all parts of the organization
function in a manner consistent with organizational policies.

Types of Budget
1. Operating Budget – the plans for the conduct of business for the planning period.
a. Budgeted Income Statement
1.1 Sales Budget
1.2 Production Budget
I. Inventory levels
II. Materials cost budget
III. Direct labor cost budget
IV. Factory overhead budget
2. Cost of sales budget
3. Selling and administrative budget
4. Financial expense budget

2. Financial budget – refers to the budget of the financial resources as reflected in

the budgeted balance sheet and cash budget.
a. Cash budget
b. Budgeted Balance Sheet
c. Budgeted Statement of sources and uses of funds

3. Capital Budget – a long term budget that shows planned acquisition and disposal of
capital assets, such as land, building and equipment.

Definition of terms
a. Budgeted Income Statement – projection of revenue, expenses, and results of
operations for a definite period of time.
b. Cash Budget – a period by statement of cash at the start of a budget period,
expected cash receipts classified by source; expected cash disbursements,
classified by function, responsibility, and form; and the resulting cash
balance at the end of the budget period.
c. Fixed Budget – projection of cost at a particular or one level of production
(usually at normal capacity) for a definite period of time.
d. Government Budget – not only financial plan and a basis for performance evaluation
but also an expression of public policy and a form of control having
the force of law.
e. Kaizen Budgeting – assumes continuous improvement of products and processes.
f. Life Cycle Budget – a products revenues and expenses are estimated over its entire
life cycle (from research and development to withdrawal of customers
support).
g. Participative Budget – budget prepared using employees of all levels in the
organization.
h. Physical Budget – budget that is expressed in units of materials, number of
employees, or number of man-hours of service units rather than in
pesos.
i. Planning Budget – another term for master budget.
j. Production Budget – production plan of resources needed to meet current sales demand
and ensure adequate inventory levels.
k. Program Budget – budget for the major programs or projects that the company plans to
undertake.
l. Responsibility budget – budget for a responsibility center.
m. Rolling (continuous, Progressive) Budget – budget which is prepared throughout the
year, that is, as one month elapses, a budget is
prepared for one more month in the future.
n. Sales Budget – budget that shows the quantity of each product expected to be sold.
o. Traditional Budgeting - a system of budgeting which concentrates on the incremental
change from the previous year assuming that the previous year’s
activities are essential and must be continued.
p. Zero – Based Budgeting – a system of establishing financial plans beginning with an
assumption of no activity and justifying each program or activity
level.

Budget Manual – a detailed set of information and guidelines about the budgetary
process.
Budget Committee – decides how budget shall be prepared and settles disputes in one
segment of the business and another when differences of opinion arise.
It usually headed by the controller.
Budget Director – the individual designated to be in charge of preparing an
organization’s budget.
Budget Period – the time period covered by the budget.
Master Budget – encompasses the organization’s operating and financial plans for a
certain future period of time. It is composed of the operating budget and
financial budget.

Flexible (Variable) Budget – projection of cost at different levels of production for a

definite period of time.

What is the difference between Master Budget and Flexible Budget?

Master Budget vs Flexible Budget

Master budget is a financial forecast Flexible budget is adjusted by incorporating
that contains all budgeted revenues the changes in the activity level.
and costs for the upcoming accounting
year.
Purpose
The purpose of the master budget is The purpose of the flexible budget is to allow
to amalgamate many sub-budgets into a better comparisons with the actual results by
single one. assessing them against the actual activity
level
Activity Level
Master budget is prepared for a Flexible budget can be prepared for multiple
single activity level since is a activity levels.
static budget.

TRUE-FALSE STATEMENTS

1. The typical starting point of a master budget would be to prepare a budgeted balance
sheet.
2. A company that is profitable may not have sufficient cash on hand to meet their
immediate needs.
3. In a master budget the sales forecast would be dependent upon the budgeted
production figures.
4. A company's operating cycle is the time between purchases of direct materials and
conversion of these materials back into cash.
5. A master budget is a comprehensive financial plan setting forth the financial and
operational goals of a business.
6. A master budget actually includes a number of related budgets.
7. In preparing a master budget, budgeted levels for production, manufacturing costs,
and operating expenses normally are determined after preparing the sales forecast.
8. The preparation of a budgeted balance sheet requires consideration of the budgeted
capital expenditures and budgeted net income.
9. A debt service budget summarizes cash payments required for interest, and includes
those required to pay down principal.
10. If a budget is to provide a basis for evaluating departmental performance,
departmental managers should not know what their budget targets are until after the
budget period has ended.

MULTIPLE CHOICE QUESTIONS

1. A budget that adds a new month when the current month ends is called a:

A. Capital budget. C. Rolling budget.

B. Master budget. D. There is no such budget.

2. The benefits of budgeting include all of the following except:

A. Enabling the company to produce more for less cost.

B. Assigning responsibility for situations that require corrective action.
C. Coordinating activities between departments within the organization.
D. Creating standards for evaluating performance.
3. A master budget usually includes all of the following except:

A. A sales forecast. C. A projected tax return.

B. A cash budget. D. Projected financial statements.

4. Which of the following is not a benefit of a careful and thorough budgeting process?

A. Budgeting increases management's awareness of the company's external economic

environment.
B. Budgeted net income assures the company of operating profitably.
C. The budget may provide advance warning of pending problems.
D. Budgets provide a yardstick for evaluating future performance.

5. A segment of a master budget relating to that portion of a business under the

control of a particular manager is termed a:

A. Performance report. C. Responsibility budget.

B. Production report. D. Cash budget.

6. Which of the following is not considered an operating budget?

A. Manufacturing cost budget. C. Capital expenditures budget.

B. Production schedule. D. Sales forecast.

7. Which element of a master budget would normally be prepared first?

A. A production budget. C. A budget of operating expenses.

B. A cash budget. D. Sales forecast.

8. Which of the following is a major component of a master budget?

A. A production throughput schedule. C. A manufacturing cost budget

B. A machinery maintenance schedule. D. An employee training budget.

9. The sales forecast directly affects many elements of the master budget. Which of
the following would be least affected by short-term fluctuations in the sales
forecasts?
 A. The production schedule. C. The capital expenditures budget.
B. The budgeted income statement. D. The operating expense budget.

Use the following for questions 10-11

The following information is from the manufacturing budget and budgeted financial
statements of Taylor Corp.:

Direct materials inventory, 1/1 P84,000

Direct materials inventory, 12/31 100,000
Direct materials budgeted for use during year 342,000
Accounts payable to supplier, 1/1 52,000
Accounts payable to supplier, 12/31 62,000

10. Refer to the information above. For the year, budgeted purchases of direct
materials amounted to:

A. P343,000 C. P358,000
B. P326,000 D. P368,000

11. Refer to the information above. For the year, budgeted cash payments to
suppliers amounted to:

A. P342,000 C. P332,000
B. P348,000 D. P352,000

12. Shoreline Corporation has budgeted a total of P361,800 in costs and expenses for
the upcoming quarter. Of this amount, P45,000 represents depreciation expense and
P7,300 represents the expiration of prepayments. Shoreline 's current payables
balance is P265,000 at the beginning of the quarter. Budgeted payments on current
payables for the quarter amount to P370,000. The company's estimated current
payables balance at the end of the quarter is:

A. P179,500 C. P203,500
B. P204,500 D. P310,000

Use the following to answer 11-12

On March 1, Grant Corporation plans to borrow P450,000 from the Ireland State Bank by
signing a 12%, 15-year note payable. The note calls for 180 monthly payments of
P5,000, which includes both interest and principal components.

13. Refer to the information above. Grant 's budgeted interest expense for March is:

A. P500 C. P4,000
B. P4,500 D. P5,000

14. Refer to the information above. Of Grant 's budgeted debt service cost of P5,000
in March, the amount applied to the principal of the note totals:

A. P500 C. P4,500
B. P4,000 D. P5,000

Use the following to answer 15-16

Morrow Corporation makes all sales on account. The June 30th balance sheet balance in
its account’s receivable is P400,000, of which P240,000 pertain to sales that were made
during June. Budgeted sales for July are P1,250,000. Morrow collects 70% of sales in
the month of sale; 20% in the following month; and the final 10% in the second month
after the sale.

15. Refer to the information above. What are Morrow 's budgeted collections for
July?

A. P800,000 C. P1,083,000
B. P939,000 D. P915,000

16. Refer to the information above. What is the budgeted balance of Morrow 's
accounts receivable as of July 31?

A. P375,000 C. P415,000
B. P399,000 D. P396,000

17. Capricorn, Inc. uses a flexible budget. Capricorn produced 16,000 units in May
incurring direct materials cost of P20,480. Its master budget for the year
projected direct materials cost of P362,500, at a production volume of 290,000
units. A flexible budget for May should reflect direct materials cost of:

A. P20,480 C. P21,000
B. P20,000 D. P19,750

18. Tidwell Corporation sells a single product for P20 per unit. All sales are on
account, with 60% collected in the month of sale and 40% collected in the following
month. A schedule of cash collections for January through March of the coming years
reveals the following receipts for the period.

Cash receipts
January February March
December receivable P32,000
From January sales P54,000
From February sales P36,000 P44,000
From March sales P72,000

Other information includes the following:

 Inventories are maintained at 30% of the following sales.
 Tidwell desire’s a minimum cash balance of P15,000. Total payments in January are
expected to be P106,500, which excludes P12,000 of depreciation expense. Any
required borrowings are multiples of P1,000.
 The December 31 balance sheet for the preceding year revealed a cash balance of
P24,900
Ignoring income taxes, the financing needed in January to maintain the firm’s minimum
cash balance is
A. P8,000 C. P10,600
B. P11,000 D. P23,000

Items 19 and 20 are based on the following information

Ramen Corporation has the following sales budget for last six months of 2017:

July P 200, 000

August 160, 000
September 220, 000
October 180, 000
November 200, 000
December 188, 000
 Historically, the cash collection on sales has been as follows:

 65 % of sales collected in the month of sale

 25 % of sales collected in the month following sale
 8 % of sales collected in the second month following sale, and
 2 % of sales is uncollectible
19. Determine the cash collections for October.

A. P 117, 000 C. P 184, 800

B. P 176, 400 D. P 199, 000

20. What is the ending balance of accounts receivable for September, assuming
uncollectible balance is written off after the second month?

A. P 199, 000 C. P 93, 000

B. P 97, 000 D. P 89, 800