Budgeting

(Profit Planning)

Professor: John Anthony M. Labay, CPA, MBA

 Global Reciprocal Colleges
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TITLE: Budgeting
I. Learning Outcomes
1. Definition and Concept of Master Budget

II. Discussion

Profit planning can be defined as the set of steps that are taken by firms to achieve the desired
level of profit. Planning is accomplished through the preparation of a number of budgets, which,
when brought through, from an integrated business plan known as master budget. The master
budget is an essential management tool that communicates management's plan throughout the
organization, allocates resources, and coordinates activities.

A budget is a detailed plan for acquiring and using financial and other resources over a specified
period of time. It represents a plan for the future expressed in formal quantitative terms. The act
of preparing a budget is called budgeting. The use of budgeting to control a firm's activities is
called budgetary control.

A master budget is a set of interconnected budgets of sales, production costs, purchases,

incomes, etc. and it also includes pro forma financial statements. A budget is a plan of future
financial transactions. A master budget serves as planning and control tool to the management
since they can plan the business activities during the period on the basis of master budget. At the
end of each period, actual results can be compared with the master budget and necessary control
actions can be taken.

Components of Master Budget

Master budget has two major sections which are the operational budget and the financial budget.
They have following components:

Operational Budget
1. Sales Budget
2. Production Budget
3. Direct Material Purchases Budget
4. Direct Labor Budget
5. Overhead Budget
6. Selling and Administrative Expenses Budget
7. Cost of Goods Manufactured Budget

Financial Budget
1. Schedule of Expected Cash Receipts from Customers
2. Schedule of Expected Cash Payments to Suppliers
3. Cash Budget
4. Budgeted Income Statement
5. Budgeted Balance Sheet
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Note that all of the above component budgets may not be included in the master budget of every
business. Some of these such as production budget and cost of goods manufactured budget are
not need by a non-manufacturing business.

III. Learning Exercises

1. Tils Company has projected sales and production in units for the second quarter of the coming
year as follows:
April May June
Sales 55,000 45,000 65,000
Production 65,000 55,000 55,000

Cash-related production costs are budgeted at P7 per unit produced. Of these production costs,
40% are paid in the month in which they are incurred and the balance in the following month.
Selling and administrative expenses will amount to P110,000 per month. The accounts payable
balance on March 31 totals P193,000, which will be paid in April.

All units are sold on account for P16 each. Cash collections from sales are budgeted at 60% in
the month of sale, 30% in the month following the month of sale, and the remaining 10% in the
second month following the month of sale. Accounts receivable on April 1 totaled P520,000
(P100,000 from February's sales and the remainder from March).

Required:
a. Prepare a schedule for each month showing budgeted cash receipts for Tils Company.

b. Prepare a schedule for each month showing budgeted cash disbursements for the Tils
Company.

2. A sales budget is given below for one of the products manufactured by the Kikay Co.:
Sales Budget in Units
January 20,000
February 35,000
March 60,000
April 40,000
May 30,000
June 25,000

The inventory of finished goods at the end of each month must equal 20% of the next month's
sales. On December 31, the finished goods inventory totaled 4,000 units.

Each unit of product requires three specialized electrical switches. Since the production of these
specialized switches by Kikay's suppliers is sometimes irregular, the company has a policy of
maintaining an ending inventory at the end of each month equal to 30% of the next month's
production needs. This requirement had been met on January 1 of the current year.

Required:
Prepare a budget showing the quantity of switches to be purchased each month for January,
February, and March and in total for the quarter.

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3. Glins Corporation is working on its direct labor budget for the next two months. Each unit of
output requires 0.29 direct labor-hours. The direct labor rate is P70.00 per direct labor-hour. The
production budget calls for producing 5,600 units in July and 6,100 units in August.

Required:
Construct the direct labor budget for the next two months, assuming that the direct labor work
force is fully adjusted to the total direct labor-hours needed each month.

4. Goke Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
variable overhead rate is P5.10 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is P78,840 per month, which includes depreciation of P20,520. All other
fixed manufacturing overhead costs represent current cash flows. The September direct labor
budget indicates that 5,400 direct labor-hours will be required in that month.

Required:
a. Determine the cash disbursement for manufacturing overhead for September.

b. Determine the predetermined overhead rate for September.

5. Borl Inc. bases its selling and administrative expense budget on the number of units sold. The
variable selling and administrative expense is P8.30 per unit. The budgeted fixed selling and
administrative expense is P93,870 per month, which includes depreciation of P16,380. The
remainder of the fixed selling and administrative expense represents current cash flows. The
sales budget shows 6,300 units are planned to be sold in October.

Required:
Prepare the selling and administrative expense budget for October.

6. Matuse Corporation is preparing its cash budget for October. The budgeted beginning cash
balance is P17,000. Budgeted cash receipts total P187,000 and budgeted cash disbursements
total P177,000. The desired ending cash balance is P40,000. The company can borrow up to
P120,000 at any time from a local bank, with interest not due until the following month.

Required:
Prepare the company's cash budget for October in good form.

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IV. Assessment

1. Cart Company has projected sales and production in units for the fourth quarter of next year
as follows:
October November December
Sales 60,000 40,000 50,000
Production 50,000 50,000 60,000

Required:
a. Cash production costs are budgeted at P6 per unit produced. Of these production costs, 40%
are paid in the month in which they are incurred and the balance in the following month. Selling
and administrative expenses (all of which are paid in cash) amount to P120,000 per month. The
accounts payable balance on September 30 totals P192,000, all of which will be paid in October.
Prepare a schedule for each month showing budgeted cash disbursements for Cart Company.

b. Assume that all units will be sold on account for P15 each. Cash collections from sales are
budgeted at 60% in the month of sale, 30% in the month following the month of sale, and the
remaining 10% in the second month following the month of sale. Accounts receivable on
September 30 totaled P510,000 (P90,000 from August sales and the remainder from September).
Prepare a schedule for each month showing budgeted cash receipts for Cart Company.

2. Welt Industrial Gas Corporation supplies acetylene and other compressed gases to industry.
Data regarding the store's operations follow:
• Sales are budgeted at P390,000 for November, P370,000 for December, and P380,000
for January.
• Collections are expected to be 90% in the month of sale, 5% in the month following the
sale, and 5% uncollectible.
• The cost of goods sold is 60% of sales.
• The company purchases 70% of its merchandise in the month prior to the month of sale
and 30% in the month of sale. Payment for merchandise is made in the month following the
purchase.
• Other monthly expenses to be paid in cash are P21,800.
• Monthly depreciation is P18,000.
• Ignore taxes.

Statement of Financial Position

October 31

Assets
Cash P 25,000
Accounts receivable (net of allowance for
uncollectible accounts) 71,000
Inventory 163,800
Property, plant and equipment (net of P504,000
accumulated depreciation) 1,088,000
Total Assets P 1,347,800

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Liabilities and Stockholders’ Equity

Accounts payable P 232,000
Common stock 700,000
Retained earnings 415,800
Total Liabilities and Stockholders’ Equity P 1,347,800

Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.

b. Prepare a Merchandise Purchases Budget for November and December.

c. Prepare Cash Budgets for November and December.

d. Prepare Budgeted Income Statements for November and December.

November December
Sales
Cost of Goods Sold __________ __________
Gross Profit
Bad debt expense
Other monthly expenses
Depreciation __________ __________
Net Operating Income __________ __________

e. Prepare a Budgeted Balance Sheet for the end of December.

Assets
Cash
Accounts Receivable (net)
Inventory
Property, plant, and equipment (net) ___________
Total Assets ___________

Liabilities and Stockholders’ Equity

Accounts Payable
Common Stock
Retained Earnings ___________
Total Liabilities and Stockholders’ Equity ___________