Module 4 Profit Planning - Budgeting

MODULE 4
PROFIT PLANNING OR BUDGETING
Overview
Each firm exists for a purpose and has goals to accomplish. These are set by the firm’s
board of directors and are to be accomplished by the firm’s executive team, led by the President
and his operating officers. To ensure performance, the team must optimize the use of all
resources and appropriate techniques available at their disposal. Such resources include money,
manpower, materials, machines, methods, information and technology among others. Managerial
techniques include organizational structures, policies, strategies, standards and operating
procedures.
The president must be able to communicate effectively the firm’s goals and objectives,
show the direction or ways to achieve them, set the standards of performance, motivate the
firm’s people to act and establish the necessary controls or measures in order to get things done
with utmost efficiency and effectiveness. Success depends upon the commitment of each
employee, especially the managers at the different levels and different areas of the firm’s
operations. As such, the president must encourage, if not force, the participation or involvement
of the said stakeholders in every stage of the process of attaining the firm’s goals. One of the
techniques utilized to achieve this is the budgeting process.
The budget is a detailed plan for acquiring and using financial and other resources over
a specified time period. It represents the firm’s plans for the future expressed in quantitative
terms. The budget serves as a road map that guides the managers along the way and a chart of
the firm’s course of operations. Budgeting is the act of preparing a budget and budgetary
control is the use of budget to control a firm’s activities.
Purposes of Budgets
Budgets make the decision making process more effective by helping managers meet
uncertainties regarding the future. Its objective is to promote a deliberate, well-conceived
business judgment instead of accidental success in business management. When planning is done
well, many problems are anticipated before they arise and solutions can be sought through
deliberate study. Preparing a well-defined budget requires the concerted effort of all management
levels. Budgets serve a number of useful purposes, which includes:
Formalize the Planning Process.
Perhaps the foremost purpose of budgeting is to compel managers to think about the
future. This forces them to set goals, consider future problem areas and formulate strategies.
Budgeting motivates managers to anticipate opportunities, problems and actions rather than to
merely react. Budgeting helps the firm in defining broad objectives and goals and formulating
strategies to achieve such objectives.
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Create a Plan of Action
The planning process brings together ideas, forecasts, resource availability and financial
realities to create a course of action to achieve the firm’s goals and objectives. Build the plan,
and then use it!
Coordinate and Integrate Management‘s Efforts
The budgeting process opens the lines of communication within the firm (a) up and down
organizational lines of subordinates and superiors and (b) across organizational lines to integrate
functional tasks. It entails coordinating the activities of the various parts of the firm and ensuring
that the parts are in harmony with each other. Goal congruence refers to a firm’s striving to
achieve a common set of objectives.
Aid in Resource Allocation
Budgeting enables the firm to allocate its resources to where they can be used most
effectively.
Motivate managers
Managers are driven to achieve their budget targets because (a) they participated in its
making and thus take pride in achieving it; (b) thru the budget, they see clearly how their roles
fit together with the firm as a whole and (c) because their promotion and incentives are based
on performance, which include meeting their budget targets. By doing so, managers are
motivated to strive in achieving the firm’s goals since their respective budget targets are in line
with it.
Create a Basis for Performance Evaluation
Actual results lack meaning unless they are compared to some target or budgeted
performance. A budget serves as a benchmark or standard against which actual results are
measured and managers’ performance are evaluated. Significant variances between actual and
planned require explanations and often, corrective actions.
Promote Continuous Improvement
Budgeting quantifies and integrates into operational plans many improvement processes
such as redesigning processes, increasing productivity, eliminating non value adding activities
and minimizing quality problems.
Create an Aura of Control
A budget system serves as a fiscal disciplinarian and helps ensure that managers
understand their authority, responsibility and limitations. Budgeting forces managers to plan,
provides information for decision making, sets benchmarks for control and evaluation and
improves the process of communication and coordination.
A good budgeting system provides for both planning and control. Planning
involves developing objectives and preparing various budgets to achieve those objectives. In
here, the managers anticipate the future events, develop a plan of action and estimate future
revenues and costs. Control refers to the steps taken by management to increase the likelihood
of attaining the objectives set in the planning stage and that all parts of the organization are
working together toward that goal. In here, feedbacks on actual operating results are used to
compare with the plan, to evaluate performance and to make the necessary changes. This
planning and control system can be viewed as a cycle as shown below:
Prepare the
Master Plan
Plan
Review and Record
Evaluate Act
Update Plan Transactions
Control
Report on
Actual vs Plan
A planning and control system includes tools, methods and attitudes. Common elements
are:
1. Strategic planning process. This long range planning defines the firm’s mission (why the
firm exists), the long range goals (what level of achievement it expects) and strategic plan
(what markets, price policies, resource needs, and production capabilities the firm will have)
2. Business plan and personal goal setting. Creating the annual business plan is the task of
evaluating the firm’s strengths and weaknesses, opportunities and tactics to build firm wide
priorities for the coming year. Each manager also develops a personal set of goals and a plan
of achievements that are consistent with the firm’s business plan.
3. Planning process and timetable. A budgeting schedule includes when to start the process,
submit budgets, review and approve budgets at various management levels – answers who,
what and when.
4. Responsibility accounting system. A planning and control system that combines

responsibility centers, control reports, activity centers and cost drivers from activity based
costing.
5. Reward (incentive) system. Rewards are given to managers who achieve their unit’s
budget goals and or MBO targets. Tying performance to compensation is becoming an
increasingly common practice.
6. Financial modeling. Ability to evaluate alternative or “what if” scenarios are an expected
part of any financial planning system. Simulation can test a plan to assess goal achievement
and evaluate alternative actions.
7. Participatory budgeting. It is assumed that every manager is involved in planning and
control. Often, budget objectives are set at the executive level but budgets are constructed
from the bottom up – sometimes called as “grass roots” budgeting.
Conflicting Roles of Budgets
Conflicts may arise when a single budget system is used to serve several purposes, such
as:
Planning vs. Motivation - demanding budgets that may not be achieved may be appropriate to
motivate maximum performance, but they are unsuitable for planning purposes. A budget should
be set based on easier targets that are expected to be met.
Planning vs. Performance Evaluation - in planning, budgets are set in advance of the budget
period based on an anticipated set of circumstances or environment. Performance evaluation
should be based on a comparison of actual performance with an adjusted budget to reflect the
actual circumstances under which managers operated.
In practice, many firms compare actual performance with the original budget (adjusted to
the actual level of activity Ex. flexible budget), but if the circumstances envisaged when the
original budget was set have changed then there will be a planning and evaluation conflict. The
ultimate objective must be to develop a realization that the budget is designed to be a positive
aid in achieving both individual and firm’s goals.
Limitations of Budgets
Budgets tend to simplify real situations by failing to consider variations in external or

qualitative factors.
1. Lack of understanding of the fundamentals of budget preparation and execution adversely
affects the motivation and commitment of higher and lower management.
2. Failure to realize that a budget is just a means to attaining profitable activity, and not the end
in itself, adversely affects the leadership styles of managers.
3. Budget reports usually emphasize results, not reasons.
Types of Budgetary Systems
A. As to Level of Performance Standard
1. Stretch level budget – based on idealistic conditions and has small chance of being
met.
2. Highly achievable budget – challenging but which can be met thru hard work
B. As to Flexibility of Budget
1. Flexible budget – projection of revenues and costs at different levels of activity. It

separate costs into fixed and variable components and uses standard costing to
prepare budgets at multiple activity levels. Actual costs are compared with budgeted
costs based on actual level of production to obtain and analyze variances.
2. Fixed (Static) budget – projection of revenues and costs at a particular or single level
of activity. It does not segregate costs into fixed and variable components. Actual costs
are compared with the budgeted costs regardless of actual level of production, to
obtain and analyze cost variances.
3. Activity Based budget – applies ABC principles and procedures to budgeting. It requires
three steps, namely: identification of activities, estimation of activity output demands
and estimating the costs of resources needed to provide the activity output demanded.
4. Kaizen Budget – assumes “continues improvement” of products and processes, the

effects of improvement and the costs of their implementation.
C. As to Budget Period
A budget period is the length of time for which a budget is effective. Factors
affecting the budget period established includes purpose of the plan, reliability of
information and normal turnover periods or seasonal cycles.
1. Periodic (Annual) budget –covers 1 year only, usually divided in quarters or months.
2. Continuous (Perpetual/Rolling/Progressive) budget – a 12 month budget that rolls

forward one month or quarter as the current month or quarter is completed.
Irrespective of whether the budget is prepared on an annual or a continuous basis,

it is important that monthly or four-weekly budgets be used for control purposes.
3. Capital budget – a long term budget showing the planned financing, acquisition and
disposal of fixed assets.
4. Life Cycle budget – a product’s revenues and expenses are estimated over its entire
life cycle (from research and development to withdrawal of customer support). It is
useful in target costing & target pricing.
D. As to Base Amount
1. Zero based budget – a budget wherein managers are required to justify all
expenditures (costs) as if programs involved are being proposed for the first time.
2. Incremental (Traditional) budget – a budget prepared based on previous period’s

budget, adjusted based on changes expected to happen in the coming period.
Managers are required to justify only the changes (increments) made on the previous
budget.
E. As a Major Component of the Master Budget
1. Operating budget – a projection of revenues, expenses and results of operations for

a specific period of time.
2. Financial budget – a budget of the financial resources as reflected in the budgeted

balance sheet.
3. Capital budget – a budget for significant investments in projects that have long term
implications such as the purchase of property, plant and equipment.
Responsibility for Budgets
Budgetary administration refers the procedures used in preparing a budget, securing

its approval and disseminating it to the firm’s stakeholders. The primary responsibility regarding
budget administration rests with the chief executive of the firm. However, he may delegate such
responsibility to an individual (usually the Controller) or to a specific group called the budget
committee.
In order to ensure that the budget to be prepared will be compatible with the strategic
objectives of the firm and to minimize the possible budgetary slack, the top management must
provide the guidelines and the statistical inputs needed in preparing the budget. The top
management should also provide the reward system associated with budgetary system.
The Budget Committee, also known as management committee or executive committee

is a group of key management persons (president, vice presidents for sales, production, research
and development, human resources, administration and finance, and the controller) who are
responsible for overall policy matters relating to the budget program. It oversees the preparation
and administration of the budget. Its principal functions are:
1. To formulate and decide the general policies of the firm’s budgetary system.
2. To request, review and revise individual budgets from the different units of the firm.
3. To approve the budgets and subsequent revisions therein.
4. To receive, analyze and evaluate budget reports.
5. To recommend necessary actions to improve operational efficiency and effectiveness.
The chief executive of the firm may appoint the controller to serve as head of the committee
for two major reasons namely:
1. The controller’s position is independent from the operating parts of the firm
2. The controller has skills and experiences in coping with intricacies of setting up the budget.
As the overall coordinator of the budgeting process, the controller recommends how
budgets should be prepared, assembles the budgets, prepares periodic reports showing variances
between actual and planned results, interprets the variances, and give recommendations for
improvement where possible.
It is to be noted that a well defined budget is a product of the concerted effort of all
management levels of the firm. Top management must support the budgeting process by
establishing a clearly delineated lines of authority and responsibility, involving the managers in
the planning process, setting appropriate goals and objectives that can be easily translated into
plans and actions at lower management levels, reviewing the budgets thoroughly before
approving it and by doing a follow up and review of budget reports with the intent of encouraging
budget updates and goal oriented actions. The middle management in turn must make a careful
and rigorous review of the budgets proposed by the lower level management. To do this function
effectively, they must know the inner workings of the activities reporting to them. Lastly, lower
level management must make an honest and accurate projection of revenues and expenses
related to the future activities of their respective units. This mutual cooperation of the different
levels of management prevents or overcomes the common budgetary problems such as budget
slack (budgeting revenues too low and expenses too high to cover anticipated budget cuts),
misstatement of revenues and expenses to earn approval of projects, hiding over spending on
one project by charging expenses to another project, blaming controllable budget variances on
non-controllable events, and pressuring subordinates which encourages them to act unethically
to meet the budget.
A self imposed (participative) budget is a method of preparing budget in which managers

prepare their own budgets, reviewed by their superiors and any issues are resolved by mutual
agreement. It is generally considered as the most effective method of budget preparation. In
here managers are challenged to operate effectively and efficiently and find satisfaction in
attaining the goals of the budget to which they participated in the making.
Budget Period
The budget period is the length of time for which a budget is effective. It is determined
based on factors such as purpose of the budget, reliability of information and normal turnover
periods or seasonal cycles.
A budget usually covers one year and divided into quarters or months. In some cases, the
budget is prepared for a period beyond one year, depending on how the budget is used. A budget
may have no particular budget period but it should be complete and comprehensive.
Firms are increasingly using a rolling budget, a budget that is always available for a specific
period of time by adding a month or quarter in the future as the month or quarter just ended is
dropped. The budgeting is a continuous process, and managers are encouraged to constantly
look ahead and review future plans. Furthermore, it is likely that actual performance will be
compared with a more realistic target, because budgets are being constantly reviewed and
updated.
The Master Budget
The master budget represents the summary of the management’s plans and outlines the
way to accomplish these plans. In here, specific targets are set for sales, production, distribution
and financing activities, culminating in the preparation of a cash budget, budgeted income
statement and budgeted balance sheet. Such budgets are separate but interdependent.
The starting point of budget effort should always be the most constraining variable, which
is generally, sales. Most managers work to generate more sales. However, other constraining
variables might be:
1. Machine capacity in a specialized area (Ex. Plastic extruding equipment in a plastic bottle
plant.)
2. Floor space in a retail outlet
3. Salesmen’s time to make calls on customers (Ex. Sales reps who must decide on which client
to visit)
4. Tables in a restaurant (where demand for reservations cannot be met)
When a variable other than sales limits growth, it becomes the starting point for planning.
But for most firms, sales units or revenue is the limiting resource.
A typical master budget diagram for a manufacturing firm follows.
Sales Budget
Inventory
Budget
Operating Expense Budget Production Budget
Research & Development
Marketing & Distribution
Customer Services
Administrative
Direct Materials Direct Labor Factory Overhead

Budget Budget Budget
Cost of Sales Budget
Budgeted
Income Statement
Schedule of
Schedule of
Cash Payments Cash Budget
Collections
Capital Budgeted
Expenditures
Balance Sheet
Budget
Components of the Master Budget

A. Operating Budget
1. Sales budget
It is a schedule showing the expected sales (amount & units) over a specific time
period. It is “the key” to the budgeting process. It provides the basis for projected cash
receipts as well as for constructing the other budgets such as production, operating
expenses and capital expenditure budget. Accuracy of sales budget impacts the whole
budget.
The sales department prepares the sales budget based on sales forecast
considering external and internal factors such as industry trends, economic and political
conditions, purchasing power of peso, customer preferences, pricing and promotion
policies of the firm, projected plant expansion and others. Methods of forecasting: sales
department estimates, survey of customers, survey of executive opinions, statistical
methods
2. Production budget
This is a detailed plan showing the number of units that must be produced during
a period to meet both sales and inventory requirements. It becomes the basis for
determining the budgets for direct materials, direct labor and factory overhead which in
turn becomes input for the cash expenditures budget.
3. Direct materials budget
This is a detailed plan showing the amount and number of units of raw materials
that must be purchased during a period to meet both production and inventory needs.
4. Direct labor budget
It is a detailed plan showing labor requirements over specific period of time. Factors
affecting this budget include level of skills of laborers, labor rate per hour, and time
requirements among others.
5. Manufacturing overhead budget
It is a detailed plan showing the production costs, other than direct materials and
direct labor, which will be incurred over specific period of time. Overhead costs can
either be fixed or variable, in which case the level of activity becomes relevant in
computing the total cost.
6. Ending Finished Goods inventory budget
This is a budget that shows the peso amount of cost expected to appear on the
balance sheet for unsold units at the end of a period
7. Purchases budget
It is a budget that shows the number of units and the amount of goods (raw
materials) to be purchased for the period.
8. Budgeted Cost of Sales
It is a budget that shows the cost of goods manufactured, cost of goods available
at the beginning and end of period, as well as the cost of goods sold for a specific time
period.
9. Selling and Administrative Expense budget
This is a detailed schedule of planned expenses that will be incurred in areas other
than production, over specific time period. Like manufacturing overhead, these costs
are made up of fixed and variable components in which case the level of activity affects
the total costs to be incurred.
10.Budgeted Income Statement
It is a detailed plan showing the overall result of operations over a specific time
period
B. Financial Budget
1. Cash budget
It is a detailed plan showing how cash resources will be acquired (cash receipts
budget) and used (cash disbursements budget) over specific time period.
Normally, the bulk of cash receipts come from customers. Other sources of cash
are interest and dividends on investments, sale of investments and other assets, and
proceeds of borrowings. Cash disbursements are made to production and operating
expenses in the current year and accrued expenses last year, currently maturing
obligations and dividends.
The timing and amount of cash flows will show the available cash at a certain
period. This will indicate the timing and amount of investing activities if there is excess
cash or financing activities to meet the firm’s required minimum cash balance.
2. Capital Expenditure budget
It is a budget showing the planned financing, acquisition and disposal of fixed

assets.
3. Budgeted Balance Sheet
It is a detailed plan of the financial position and condition of the business over a
period of time. It is developed by beginning with the current balance sheet and adjusting
it for data contained in other budgets.
4. Budgeted Cash Flow Statement
It is similar to the cash budget but sources and uses of cash is specified whether it
is related to operating, investing or financing activities.
Some of the computational formats for budgets are presented below:
Budgeted Production Budgeted Materials Purchases

Budgeted Sales xx Budgeted production (units) xx
Desired Inventory -end xx x Qty. of materials/unit xx
Total requirements xx Materials to be used xx
Expected inventory - beg (xx Desired materials invty – end xx
)
Budgeted production (units) xx Total requirements xx
Expected materials invty - beg (xx
)
Budgeted materials purchases xx
Budgeted merchandise purchases Cash Budget

Budgeted Sales xx Cash collections (receipts) Pxx
Desired merchandise Invty -end xx Cash payments (disbursements) (xx
)
Total requirements xx Net cash inflow (outflow) Pxx
Expected merchandise Invty - beg (xx Cash – beg xx
)
Budgeted merchandise purchases xx Total cash available Pxx
Desired (target) cash balance – (xx
end )
Cash surplus (deficit) Pxx
Target Cash balance – the desired cash balance that a firm plans to maintain in order
to conduct business operations. Cash surplus indicates the type of investments (usually
marketable securities) to acquire. Cash deficit indicates the external financing requirement.
Fixed and Flexible Budgeting
Fixed (Static) Budget
It is one that is based on a single level of activity. It can be used by a firm when it can
estimate its operating volume within close limits and if the cost behavior can be predicted
accurately. In here, the actual results are compared to budgeted costs at the original budgeted
activity level.
Flexible Budget
It is one that is based on multiple levels of activity. This budget adjusts revenues, costs
and expenses to the actual level of activity in which the firm operated in order to provide a valid
basis of comparison to actual costs. Thus, a budget for the firm can be prepared at various levels
of activity.
ILLUSTRATION:
WAIS CORPORATION manufactures and sells only one consumer good, product HOPE.
As of December 31,2015, the Statement of Financial Position of the firm shows the following:
Current Assets
Cash P111,216.80
Accounts Receivable (net) 327,283.20
Inventories 249,000.00
Other Current Assets 12,500.00 P700,000.00
Noncurrent Assets
Property, Plant and Equipment P4,000,000.0
0
Accumulated Depreciation (800,000.00) 3,200,000.00
Total Assets P3,900,000.0
0
Current liabilities
Accounts Payable P 21,582.40
Income tax payable 105,000.00
Property tax payable 10,000.00
Bonds Payable (10%) 400,000.00 P536,582.40
Noncurrent Liabilities
Bonds Payable (10%) 800,000.00
Total Liabilities P1,336,582.4
0
Shareholders’ Equity
Ordinary Share Capital (P100 par) P2,000,000
Accumulated Profits 563,417.60 2,563,417.60
Total Equities P3,900,000.0
0
During the last month of 2015 to the early weeks of January, 2016, the management has been
gathering data for preparing the 2016 budget. Data gathered by the controller are as follows:
a. Marketing department projected to sell 12, 500 units in the first quarter and expects to
increase it by 10% per quarter for the next two years. The sales price is expected to be at
P120/unit.
b. The company established some policies to guide operations throughout the year. For the
production department, enough goods must be produced such that 20% of the goods expected
to be sold in the next quarter will be on hand at end of each current quarter.
Direct materials at the end of each quarter must be 30% of the direct materials
requirement for the next quarter. Other data for production are as follows:
Direct materials / unit 400g @ P5 per 100g

Direct labor / unit 3 hrs @ P10 per hr
Indirect labor P2 / unit
Indirect materials P5/ unit
Utilities P3 / unit + P55, 000 per quarter
Property taxes P5, 000 per quarter
Depreciation (50% building, 50% on P50, 000 per quarter
equipments)
c. To attract customers, the company will be selling on normal credit terms, as usual. The
company projected that 75 % of sales will be collected during the quarter of sale, and the
remaining will be collected in the following quarter, with 1% of total sales estimated as
uncollectible.
d. Projected operating costs to be incurred per quarter are as follows:
Administrative Salaries P50, 000

Office supplies 2, 500
Depreciation – office equipments 10, 000
Sales salaries 40, 000
Advertising 30, 000
Sales commission 3% of sales price
Store supplies 2, 000
Depreciation – store equipments 15, 000
Depreciation – building (60% office; 40% sales) 25, 000
Property taxes 5, 000
e. Expenses are paid in cash except for direct materials of which 10% is paid the next quarter
after it was purchased and property taxes which are paid in the quarter after the property
taxes are recognized. The company’s policy is to maintain a minimum cash balance of P50,
000 at all times, for any unforeseen cash requirements or any adjustments to be made.
f. Finished Goods of the last quarter of 2015 has a cost per unit of P69.
g. Other assets were all expensed in the first quarter of 2016.
h. Current portion of bonds payable matures every Dec. 31. The firm will declare P10/sh
dividends on Dec.1 payable on Jan. 31, 2017.
i. The firm is subject to 30% income tax which will be paid in the first week following each
quarter of operations.
REQUIRED: Prepare the Master Budget of WAIS Corporation for 2016 in a quarterly basis.
Schedule 1: Sales Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4
Budgeted sales in units 12,500 13,750 15,125 16,638
Sales price / unit P120 P120 P120 P120
P1,500,00 P1,650,00 P1,815,00 P1,996,56
Budgeted sales in pesos 0 0 0 0
Schedule 2: Production Budget
Quarter1 Quarter2 Quarter3 Quarter4

Budgeted sales in units 12,500 13,750 15,125 16,638
Desired Finished goods - end 2,750 3,025 3,328 3,661
Total needs 15,250 16,775 18,453 20,299
Finished goods - beg (2,500) (2,750) (3,025) (3,328)
Budgeted production units 12,750 14,025 15,428 16,971
Schedule 3: Direct Materials Budget

Std. materials / unit ( kg ) 0.4 0.4 0.4 0.4
Budgeted DM usage ( kg ) 5,100.00 5,610.00 6,171.20 6,788.40
Desired DM -end (kg) 1,683.00 1,851.36 2,036.52 2,240.16
Total needs 6,783.00 7,461.36 8,207.72 9,028.56
(1,530.00 (1,683.00 (1,851.36 (2,036.52
DM - beg ( kg ) ) ) ) )
Budgeted DM Purchases
(kg) 5,253.00 5,778.36 6,356.36 6,992.04
Purchase price / kg P50 P50 P50 P50
Budgeted DM Purchases (P) P262,650 P288,918 P317,818 P349,602
Schedule 4: Direct Labor Budget

Std. Direct labor hours/unit 3 3 3 3
Budgeted direct labor hours 38,250 42,075 46,284 50,913
DL rate/hour P10 P10 P10 P10
Budgeted Direct labor P382,500 P420,750 P462,840 P509,130
Schedule 5: Manufacturing Overhead Budget

Indirect labor P25,500 P28,050 P30,856 P33,942
Indirect materials 63,750 70,125 77,140 84,855
Utillities - variable 38,250 42,075 46,284 50,913
Utilities - fixed 55,000 55,000 55,000 55,000
Property taxes 5,000 5,000 5,000 5,000
Depreciation 50,000 50,000 50,000 50,000
Total Budgeted FOH P237,500 P250,250 P264,280 P279,710
Schedule 6: Cost of Goods Sold Budget

DM used (S3) P255,000 P280,500 P308,560 P339,420
Direct Labor (S4) 382,500 420,750 462,840 509,130
Factory OH (S5) 237,500 250,250 264,280 279,710
Cost of Goods
Manufactured P875,000 P951,500 P1,035,680 P1,128,260
F. Goods-beg 172,500 188,725.49 205,225.49 223,408.29
Goods Available
for Sale P1,047,500 P1,140,225.49 P1,240,905.49 P1,351,668.29
F.Goods - end (188,725.49) (205,225.49) (223,408.29) (243,389.30)
Cost of Goods
Sold P858,774.51 P935,000 P1,017,497.20 P1,108,278.98
Schedule 7: Budgeted Income Statement

Sales P1,500,000 P1,650,000 P1,815,000 P1,996,560
(858,774.51 (1,017,497.20
COGS ) (935,000) ) (1,108,278.98)
Gross Profit P641,225.49 P715,000 P797,502.80 P888,281.02
Operating
Expenses
Sales Salaries (40,000) (40,000) (40,000) (40,000)
Advertising (30,000) (30,000) (30,000) (30,000)
Commissions (45,000) (49,500) (54,450) (59,897)
Store Supplies (2,000) (2,000) (2,000) (2,000)
Dep. - store (15,000) (15,000) (15,000) (15,000)
Dep. – bldg (25,000) (25,000) (25,000) (25,000)
Admin. salaries (50,000) (50,000) (50,000) (50,000)
Office supplies (2,500) (2,500) (2,500) (2,500)
Dep.– office (10,000) (10,000) (10,000) (10,000)
Property taxes (5,000) (5,000) (5,000) (5,000)
Other assets (12,500)
Bad Debts (15,000) (16,500) (18,150) (19,965.60)
Operating IncomeP389,225.49 P469,500.00 P545,402.80 P628,918.62
Finance Cost (30,000.00) (30,000.00) (30,000.00) (30,000.00)
Income b4 tax P359,225.49 P439,500.00 P515,402.80 P598,918.62
(107,767.65 (131,850.00
Income tax ) ) (154,620.84) (179,675.59)
Net income P251,457.84 P307,650.00 P360,781.96 P419,243.03
Schedule 8: Cash Budget

Cash – beg P111,216.80 P426,032.60 P799,473.75 P1,218,875.75
Receipts (S8a) 1,452,283.20 1,597,500.00 1,757,250.00 1,933,020.00
(1,137,467.40 (1,224,058.85 (1,337,848.00 (1,859,281.24
Payments(S8b) ) ) ) )
Cash - end P426,032.60 P799,473.75 P1,218,875.75 P1,292,614.51
Schedule 8a: Cash Receipts Budget

A/R Dec. 31,2014 P327,283.20 P0 P0 P0
Credit Sales 2015
Q1 : P1,500,000 1,125,000 360,000
Q2 : P1,650,000 1,237,500 396,000
Q3 : P1,815,000 1,361,250 435,600
Q4 : P1,996,560 1,497,420
P1,452,283.2
Total 0 P1,597,500 P1,757,250 P1,933,020
Schedule 8b: Cash Disbursements Budget

A/P - Dec. P0 P0 P0
31,2010 P21,582.40
Direct materials 236,385.00 286,291.20 314,928.00 346,423.60
Direct labor 382,500.00 420,750.00 462,840.00 509,130.00
Indirect labor 25,500.00 28,050.00 30,856.00 33,942.00
Indirect materials 63,750.00 70,125.00 77,140.00 84,855.00
Utilities 93,250.00 97,075.00 101,284.00 105,913.00
Property taxes 10,000.00 10,000.00 10,000.00 10,000.00
Operating
expenses 169,500.00 174,000.00 178,950.00 184,396.80
Finance Cost 30,000.00 30,000.00 30,000.00 30,000.00
Income tax 105,000.00 107,767.65 131,850.00 154,620.84
Bonds Payable 400,000.00
P1,137,467.
Total 4 P1,224,058.85 P1,337,848 P1,859,281.24
Schedule 9: Budgeted Statement of Financial Position

WAIS Corporation
Statement of Financial Position
As of _____________, 2015
Mar. 31 June 30 Sept. 30 Dec. 31
P1,218,875.7 P1,292,614.5
Cash P426,032.60 P799,473.75 5 1
Accounts
Receivable 360,000.00 396,000.00 435,600.00 479,174.40
Inventories 272,875.49 297,793.49 325,234.29 355,397.30
P1,058,908.0 P1,493,267.2 P1,979,710.0 P2,127,186.2
Current Assets 9 4 4 2
PPE (net) 3,100,000.00 3,000,000.00 2,900,000.00 2,800,000.00
Total Assets P4,158,908.0 P4,493,267.2 P4,879,710.0 P4,927,186.2
9 4 4 2
Accounts Payable P26,265.00 P28,891.80 P31,781.80 P34,960.20

Income tax
payable 107,767.65 131,850.00 154,620.84 179,675.59
Property tax 10,000.00 10,000.00 10,000.00 10,000.00
Bonds Payable 400,000.00 400,000.00 400,000.00 400,000.00
Dividends Payable 200,000.00
Current Liabilities P544,032.65 P570,741.80 P596,402.64 P824,635.79
Bonds Payable 800,000.00 800,000.00 800,000.00 400,000.00
P1,344,032.6 P1,370,741.8 P1,396,402.6 P1,024,635.7
Total Liabilities 5 0 4 9
P2,000,000.0 P2,000,000.0 P2,000,000.0 P2,000,000.0
Share Capital 0 0 0 0
Accumulated
Profits 814,875.44 1,122,525.44 1,483,307.40 1,702,550.43
Shareholders' P2,814,875.4 P3,122,525.4 P3,483,307.4 P3,702,550.4
Equity 4 4 0 3
P4,158,908.0 P4,493,267.2 P4,879,710.0 P4,927,186.2

Total Equities 9 4 4 2
Schedule 9a: Inventories

P101,826.0 P112,008.0
Raw Materials P84,150.00 P92,568.00 0 0
Finished Goods 188,725.49 205,225.49 223,408.29 243,389.30
P272,875.4 P297,793.4 P325,234.2 P355,397.3
Total 9 9 9 0
Schedule 9b: Property, Plant and Equipment (PPE)

4,000,000.0
Cost 0 4,000,000.00 4,000,000.00 4,000,000.00
(1,000,000.00 (1,100,000.00 (1,200,000.00
Acc. Dep. (900,000.00) ) ) )
3,100,000.0
Book Value 0 3,000,000.00 2,900,000.00 2,800,000.00
Schedule 9c: Accounts Payable

262,650.0 288,918.0 317,818.0 349,602.0
DM Purchases 0 0 0 0
Unpaid 0.10 0.10 0.10 0.10
A/P – end 26,265.00 28,891.80 31,781.80 34,960.20
Schedule 9d: Accumulated Profits

P563,417.6 P1,122,525.4 P1,483,307.4
AP - beg 0 P814,875.44 4 0
Net Income 251,457.84 307,650.00 360,781.96 419,243.03
Dividends (200,000.00)
P814,875.4 P1,122,525.4 P1,483,307.4 P1,702,550.4
AP-end 4 4 0 3
DISCUSSION QUESTIONS
1. Define budgeting. Briefly explain the major purposes of budgets.
2. Briefly describe the different types of budgets.
3. Briefly discuss the features of a good planning and control system?
4. How does a firm prepare a good budget? Who is responsible for preparing and administering
them?
5. Define master budget? Briefly explain its purpose.
6. Briefly describe the contents of each component of the master budget.

Module 4 Profit Planning - Budgeting

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Module 4 Profit Planning - Budgeting

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MODULE 4

PROFIT PLANNING OR BUDGETING

Formalize the Planning Process.

Coordinate and Integrate Management‘s Efforts

Aid in Resource Allocation

Create a Basis for Performance Evaluation

Promote Continuous Improvement

Create an Aura of Control

4. Responsibility accounting system. A planning and control system that combines

Conflicting Roles of Budgets

Budgets tend to simplify real situations by failing to consider variations in external or

Types of Budgetary Systems

A. As to Level of Performance Standard

1. Flexible budget – projection of revenues and costs at different levels of activity. It

4. Kaizen Budget – assumes “continues improvement” of products and processes, the

2. Continuous (Perpetual/Rolling/Progressive) budget – a 12 month budget that rolls

Irrespective of whether the budget is prepared on an annual or a continuous basis,

2. Incremental (Traditional) budget – a budget prepared based on previous period’s

E. As a Major Component of the Master Budget

1. Operating budget – a projection of revenues, expenses and results of operations for

2. Financial budget – a budget of the financial resources as reflected in the budgeted

Responsibility for Budgets

Budgetary administration refers the procedures used in preparing a budget, securing

The Budget Committee, also known as management committee or executive committee

A self imposed (participative) budget is a method of preparing budget in which managers

The Master Budget

Direct Materials Direct Labor Factory Overhead

Cost of Sales Budget

Components of the Master Budget

3. Direct materials budget

4. Direct labor budget

5. Manufacturing overhead budget

6. Ending Finished Goods inventory budget

8. Budgeted Cost of Sales

2. Capital Expenditure budget

It is a budget showing the planned financing, acquisition and disposal of fixed

3. Budgeted Balance Sheet

4. Budgeted Cash Flow Statement

Some of the computational formats for budgets are presented below:

Budgeted Production Budgeted Materials Purchases

Budgeted merchandise purchases Cash Budget

Fixed and Flexible Budgeting

Fixed (Static) Budget

Direct materials / unit 400g @ P5 per 100g

d. Projected operating costs to be incurred per quarter are as follows:

Administrative Salaries P50, 000

g. Other assets were all expensed in the first quarter of 2016.

Schedule 1: Sales Budget

Schedule 2: Production Budget

Quarter1 Quarter2 Quarter3 Quarter4

Schedule 3: Direct Materials Budget

Schedule 4: Direct Labor Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Schedule 6: Cost of Goods Sold Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Schedule 7: Budgeted Income Statement

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Schedule 8a: Cash Receipts Budget

Schedule 8b: Cash Disbursements Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Schedule 9: Budgeted Statement of Financial Position

Accounts Payable P26,265.00 P28,891.80 P31,781.80 P34,960.20

P4,158,908.0 P4,493,267.2 P4,879,710.0 P4,927,186.2

Schedule 9a: Inventories