SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department
SHORT TERM 2021
A.Y. 2020-2021

MGMT 1033 - Strategic Cost Management

Week 4 – The Master Budget

Learning Outcomes: At the end of this module, you are expected to:
a. Summarize the impact of the sales forecast on the master budget
b. Outline the sequence of components of the master budget
c. Create a production budget
d. Create a direct materials budget
e. Create direct labor budget
f. Create a manufacturing overhead budget
g. Create an ending inventory budget
h. Create a selling and administrative expense budget
i. Create a cash budget
j. Create a budgeted income statement
k. Create a budgeted balance sheet

LEARNING CONTENT:

DEFINITIONS:

BUDGET - It is a quantitative expression of the objectives and goals of an enterprise It is a tool used for
both planning and control.

MASTER BUDGET - A comprehensive plan for overall activities of the enterprise- It summarizes the
forecast contained in the operating budget, the financial budget, and the capital expenditures budget. The
master budget is a complete blueprint of the planned operations of the firm for a period.

OPERATING BUDGETS - A forecast of income, sales volume, and estimate the cost of goods sold,
administrative and other expenses for a given period.

FINANCIAL BUDGETS — A forecast of the flow of cash and other funds in the business and project
the income statement and the balance sheet.

CAPITAL EXPENDITURES BUDGETS - It is prepared for individual capital expenditure projects, like
replacement, acquisition or construction of plants and major equipment.

BUDGET PERIOD - It is the length of time for which a budget is to be prepared and implemented.
PURPOSE (USES) OF BUDGETS
1. Planning
2. Evaluating performance
3. Coordinating and control activities
4. Implementing plans
5. Communication and motivation

BUDGETS CLASSIFIED BY LENGTH OF TIME:

1. Long-term Budget - provides general direction for the firm.
2. Intermediate Budget - identifies specific steps to be accomplished in achieving the long-term
goals,
3. Short-term (Annual) Budget - it is a detailed plan of operation for the coming year.

TYPES OF BUDGETS
1. Annual Budgets - a budget prepared for one fiscal year
2. Continuous (Rolling) Budget - an annual budget which continues to delete one month or period
and add one month or period, so that a twelve-month forecast is always available.
3. Flexible (Variable) Budget - a budget prepared for different levels of activity.
4. Fixed (Static) Budget - a budget based on one level of activity.
5. Long Range Budget - a forecast that covers more than one fiscal year which normally covers 5 to
10 year plan.

ADVANTAGES OF BUDGETING
1. Compels management planning.
2. Provides a framework for judging subsequent performance.
3. Promotes communication, coordination and control.
4. Motivates members of the business organization.

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 limiting factor.
2. Prepare a Production Budget based on the sales forecast.
3. Prepare a schedule of Material Usage and Purchases.
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 unusually 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 to 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 on a month-to-month or quarter-to-quarter basis.
11. Organize 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. OPERATING BUDGET
1. Sales forecast
2. Production budget
a. Material purchases 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 disbursements
2. Budgeted income statement
3. Budgeted balance sheet
4. Budgeted statement of cash flows

C. SPECIAL BUDGETS
1. Performance budgets
2. Capital budgets

SALES BUDGET
The sales budget is the starting point in preparing the master budget, since estimated sales volume influence
nearly all other items appearing throughout the master budget. The sales budget ordinarily indicates the
quantity of each product expected to be sold.

PRODUCTION BUDGET
After sales are budgeted, the production budget can be determined. The number of units expected to be
manufactured to meet budgeted sales and inventory requirements is set forth in the production budget. The
expected volume of production is determined by subtracting the estimated inventory at the beginning of
the period from the sum of the units expected to be sold and the desired inventory at the end of the period.

DIRECT MATERIAL BUDGET

When the level of production has been determined, a direct material budget should be prepared to show
how much material will be required for production and how much material must be purchased to meet the
production requirement. The purchase will depend on both expected usage of materials and inventory
levels.

DIRECT LABOR BUDGET

The production requirements as set forth in the production budget also provide the starting point for the
preparation of the direct labor budget. To compute direct labor requirements expected production volume
for each period is multiplied by the number of direct labor hours required to produce a single unit. The
direct labor hours required to meet production is then multiplied by the direct labor cost per hour to obtain
total direct labor costs.

FACTORY OVERHEAD BUDGET

The factory overhead budget should provide a schedule of all manufacturing costs Other than direct
materials and direct labor. Factory overhead budget requires the development of a predetermined overhead
rate for the variable portion of the factory overhead. Depreciation does not entail cash outlay and must be
deducted from the total factory overhead in computing cash disbursement in the preparation of cash
budget,

ENDING INVENTORY BUDGET

The desired ending inventory budget provides information for the construction of budgeted financial
statements. It will help compute the cost of goods sold and it will give the peso value of the ending materials
and finished goods inventory.

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

The selling and administrative expense budget lists the operating expenses involved in selling the
products and in managing the business.

CASH BUDGET
The cash budget provides is prepared for the purpose of cash planning and control It presents the expected
cash inflow and outflow for a designated time period. The cash budget helps management keep cash
balances in reasonable relationship to its needs. It aids in avoiding unnecessary idle cash and possible cash
shortages.

BUDGETED INCOME STATEMENT

The budgeted Income statement summarizes the various component projection of revenue and expenses
for the budget period. For planning and control purposes the budget can be divided into months or quarters
depending on the company's need.

BUDGETED BALANCE SHEET

The budgeted balance sheet is developed by beginning with the balance sheet for the year just ended and
adjusting the balances using all the activities that are expected to take place during the budget period.

BUDGET MANUAL - A budget manual is a detailed set of documents that provide information and
guidelines about the budgetary process. It should include the following:
1. Statements of the budgetary purpose and its desired results.
2. A listing of specific budgetary activities to be performed.
 3. A calendar of scheduled budgetary activities.
4. Sample budgetary forms.
5. Original, revised and approved budgets.

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.
Flexible budgeting aids in planning overhead costs, controlling costs through period reporting, special
analysis in decision making and compare results at any level of activity.

SAMPLE MASTER FIXED (STATIC) BUDGET

Sales Volume (units) 30,000

Sales at P20 P 600,000
Variable Manufacturing Costs:
Materials at P2 P 60,000
Labor at P4 120,000
Overhead at P2 60,000 240,000
Contribution Margin (Manufacturing) P 360,000
Variable Selling and Administrative at P4 120,000
Contribution Margin (Final) P 240,000
Fixed Costs:
Manufacturing P 70,000
Selling and administrative 50,000 120,000
Net Income P 120,000

SAMPLE FLEXIBLE BUDGET

Activity Levels
Volume 24,000 27,000 33,000
Sales P 480,000 P 540,000 P 660,000
Variable Manufacturing Costs:
Materials P 48,000 P 54,000 P 66,000
Labor 96,000 108,000 132,000
Overhead 48,000 54,000 66,000
Total P 192,000 P 216,000 P 264,000
Contribution Margin (Manufacturing) P 288,000 P 324,000 P 396,000
Variable Selling and Administrative 96,000 108,000 132,000
Contribution Margin – Final P 192,000 P 216,000 P 264,000
Fixed Costs:
Manufacturing P 70,000 P 70,000 P 70,000
Selling and Administrative 50,000 50,000 50,000
Total P 120,000 P 120,000 P 120,000
Net Income P 72,000 P 96,000 P 120,000

Note: Fixed costs in total at different levels of activity remains the same, while variable costs increase
proportionately with the level of activity. The fixed costs per unit at different levels of activity changes,
while variable cost per unit remains the same.
Illustration 1
Jilly Boy Corporation manufactures and sells two products, YAWA and AWIT. In July 2021, the Jilly
Boy’s budget department gathered the following information in order to project sales and budget
requirements for 2022.

2022 Projected Sales

Products Units Price
YAWA 60,000 P 70
AWIT 40,000 100

2022 Inventory in Units: Expected

Products 01-01-2021 12-31-2022
YAWA 20,000 25,000
AWIT 8,000 9,000

In order to produce one unit of YAWA and AWIT, the following raw materials are used:
Amount used per unit
Material Unit YAWA AWIT
A Kilos 4 5
B Kilos 2 3
C Each - 1

Projected data for 2022 with respect to materials is as follows:

Expected Purchase Expected Inventory Desired Inventory
Raw Material Price Jan. 1, 2022 Dec. 31, 2022
A P8.00 32,000 kilos 36,000 kilos
B 5.00 29,000 kilos 32,000 kilos
C 3.00 6,000 each 7,000 each

Projected direct labor requirements for 2022 and rates follow:

Product Hours Per Unit Rate Per Hour
YAWA 2 P3.00
AWIT 3 4.00

Overhead is applied at the rate of P2.00 per direct labor hour.

Required: Based on the above projections and budget requirements for 2021 for YAWA and AWIT,
prepare the following budgets for 2021:
1. Sales budget (in pesos)
2. Production budget (in units)
3. Raw materials usage budget (in quantities)
4. Raw materials purchase budget (in pesos)
5. Direct labor budget (in pesos)
6. Budgeted finished goods inventory at December 31, 2022 (in pesos)
SOLUTION:

1.
Jilly Boy Corporation
Sales Budget
For the Year 2022

Products Units Price Total

YAWA 60,000 P 70 P 4,200,000
AWIT 40,000 100 4,000,000
Projected Sales P 8,200,000

2.
Production Budget
For the Year 2021
(In Units)
YAWA AWIT
Projected sales 60,000 40,000
Desired Inventory, Dec. 31, 2022 25,000 9,000
Total 85,000 49,000
Expected Inv. Jan 1, 2022 20,000 8,000
Production Required 65,000 41,000

3.
Raw Materials Usage Budget
For the Year 2022
(In Quantities)

Product Production Material A Material B Material C

YAWA 65,000 260,000 130,000 -
AWIT 41,000 205,000 123,000 41,000
Production Requirement 465,000 253,000 41,000
Add: Desired Inv. – Dec. 31 36,000 32,000 7,000
Total Requirement 501,000 285,000 48,000
Less: Expected Inv. – Jan. 01 32,000 29,000 6,000
Purchase Requirement 469,000 256,000 42,000

4.
Raw Materials Purchases Budget
For the Year 2022

Material Required Units Unit Price Total

A 469,000 P8 P3,752,000
B 256,000 5 1,280,000
C 42,000 3 126,000
Raw Materials Purchases P5,158,000
5.
Direct Labor Budget
For the Year 2022

Products Total Hours Rate Amount

YAWA (65,000 x 2) 130,000 P3 P 390,000
AWIT (41,000 x 3) 123,000 4 492,000
Total Direct Labor Budget P 882,000

6. Computation of Unit Costs:

YAWA AWIT
Items Rate/Price Units Cost Units Cost
Material A P8 4 P 32 5 P 40
Material B 5 2 10 3 15
Material C 3 - - 1 3
Labor P3/P4 2 6 3 12
Overhead P2 2 4 3 6
Budgeted Unit Costs P 52 P 76

Budgeted Finished Goods Inventory

For the Year 2022

Products Units Unit Cost Total

YAWA 25,000 P 52 P1,300,000
AWIT 9,000 76 684,000
Total P 1,984,000

Illustration 2

Jilly Boy Retail Store seeks your assistance to develop cash and other budget information for May, June,
and July 2022. At April 30, 2022, the company had cash of P5,500, accounts receivable of P437,000,
inventories of P309,400, and account payable of P133,055.

The budget is based on the following assumptions:

a. Sales
1. Each month’s sales are billed on the last day of the month.
2. Customers are allowed 3% discount if payment is made within 10 days after the billing date.
Accounts receivable are booked gross.
3. Sixty percent of the billings are collected within the discount period, 25% are collected by the end
of the month, 9% are collected by the end of the second month, and 6% prove uncollectible.
b. Purchases
1. 54% of all purchases of materials and selling, general, and administrative expenses are paid the
month purchased and the remainder in the following month.
2. Each month’s units of ending inventory is equal to 130% of the next month’s units of sales.
3. The cost of each unit of inventory is P20.
 4. Selling, general and administrative expenses, of which P2,000 is depreciation, are equal to 15% of
the current month’s sales.

Actual and projected sales are as follows:

2022 Pesos Units 2022 Pesos Units
March P354,000 11,800 June P 342,000 11,400
April 363,000 12,100 July 360,000 12,000
May 357,000 11,900 August 366,000 12,200

Required:
Prepare cash forecast for the months of May, June, and July 2022, based on the above data and
supported by the following schedules:
a. Cash receipts from accounts receivable.
b. Cash disbursements on accounts payable.
c. Purchases of inventory.
d. Cash disbursements on selling, general, and administrative expenses.

Solution:
a. Schedule 1
Schedule of Cash Receipts from Accounts Receivable
For the Months of May, June, and July 2022

Month May June July

March 9% x P354,000 P 31,860
April 60% x P363,000 x 97% 211,266
25% x P363,000 90,750
9% x P363,000 P 32,670
May 60% x P357,000 x 97% 207,774
25% x P357,000 89,250
9% x P357,000 P 32,130
June 60% x P342,000 199,044
25% x P342,000 85,500
Total P 333,876 P 329,694 P316,674

b. Schedule 2
Schedule of Cash Receipts from Accounts Receivable
For the Months of May, June, and July 2022

Month May June July

April 46% x P236,800 P 108,928
May 54% x P225,000 121,500
46% x P225,000 P 103,500
June 54% x P243,600 131,544
46% x P243,600 P112,956
July 54% x P245,200 132,408
Total P230,428 P235,044 P244,464
c. Schedule 3

Computation of Ending Inventories:

April =(11,900 x 130%) =15,470 units
May =(11,400 x 130%) =14,280 units
June =(12,000 x 130%) =15,600 units
July =(12,200 x 130%) =15,860 units
Schedule of Purchases of Inventory
For the Months of May, June, and July 2022
May June July
Expected Sales – in Units 11,900 11,400 12,000
Desired Inventory End 14,820 15,600 15,860
Total 26,720 27,000 27,860
Expected Inventory Beg. 15,470 14,820 15,600
Purchases in Units 11,250 12,180 12,260
Unit Cost P 20.00 P20.00 P20.00
Total Purchases P225,000 P243,600 P245,200

d. Schedule 4
Schedule of Cash Disbursements
Selling, General, and Administrative Expenses
For the Months of May, June, and July 2022

Month May June July

April (P54,450 – P2,000) x 46% P 24,127
May (P357,000 x 15%) – P2,000 x 54% 27,837
(53,550 – P2,000) x 46% P 23,713
June (342,000 x 15%) – P2,000 x 54% 26,622
(P51,300 – P2,000) x 46% P 22,678
July (P360,000 x 15%) – P2,000) x 54% 28,080
Total P51,964 P50,335 P50,758

Jilly Boy Retail Store

Cash Forecast
For the Months of May, June, and July 2022
May June July
Cash Balance, Beginning P 5,500 P 56,984 P 101299
Receipts: (Schedule 1) 333,876 329,694 316,674
Cash available P 339,376 P 386,678 P 417,973
Disbursements:
Purchases P 230,428 P 235,044 P 244,464
Expenses 51,964 50,335 50,758
Total Disbursements P 282,392 P 285,379 P 295,222
Cash Balance, Ending P 56,984 P 101,299 P 122,751

END