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Short-Term Budgeting for Special Transaction

Accounting for Special Transactions and Business Combinations (Batangas State

University)

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Module 3
Short-Term Budgeting

Introduction

Repeated references to budget allowances have been made throughout previous chapters and
we have seen how closely accounting and budgeting are related and how one depends on the
other. Accounting draws some of its data from planned performances established in the budget;
in turn, recorded historical data provide a basis for determining budget estimates.

Intended Learning Outcomes

After studying this chapter, students should be able to
1. Define budgeting and other related terminologies
2. Understand the uses of the process of budgeting
3. Understand the functions and composition of budget committee
4. Determine the relationships between operating and financial budgets
5. Identify the different types of budgets or the major composition of the master budget
6. Prepare a master budget and its supporting schedules
7. Prepare operating and financial budgets using the flexible budget model
8. Describe the different models of budgeting
9. Relate budgeting to standards-setting, planning and controlling functions of management

Budget defined

A budget is 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.

The act of preparing a budget is called budgeting. The use of budgets to control a firm’s
activities is known as budgetary control.

The overall or master budget (also known as planning budget or budget plan) indicates the
sales level, production and cost levels, income and cash flows that are anticipated for the
coming year.

The master budget is a summary of all phases of a company’s plans and goals for the future.
In short, it represents a comprehensive expression of management’s plan for the future and how
these plans are to be accomplishe.

The Budgetary System

The CEO has a mission to accomplish and an objective to achieve. Otherwise, he has no
business keeping his job. To achieve the objectives, he has to devise strategies to win people
and optimize other resources in the organization. The key paradigm is “winning people”. To do

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this and to unleash the power of organizational oneness, the CEO must encourage employee
participation and involvement and enlist their commitment towards the organizational objectives.
These could be done through the process of budgeting, which has the following uses:

1. Communication.

The most important process of management is communication. Vision, mission, goals,

objectives, plans, standards, and performance evaluation measures must be clearly articulated
and understood among officers and personnel. More than understanding, man in the
organization must believe, get involved and work with commitment in achieving organizational
goals. This could be done by clearly delineating the lines of communications i.e., an
organizational structure should clearly define the lines of authority and responsibility.

2. Motivation
As communication lines are cleared and made more transparent, people will understand the
end-results of organizational plans and ask. As they are made part in conceptualizing the plans,
they get involved and become more committed in attaining plans. This process moves people to
act in accordance with organizational goals.

3. Standards.
After the actions, results should be summarized and evaluated. At the very onset, the
measurement to be used in evaluating performance must be established. These measures of
performance are called “standards”. They must be clearly defined and agreed-upon between
the person, whose performance is evaluated, and the evaluator. If standards are too high or
improbable to achieve, people get demoralized as there is no fair chance of getting a high
performance rating. If standards are too low, people are not motivated to exert their best effort,
thereby encouraging mediocre results. Standards are set to motivate. They are also an
important basis for planning and controlling. Standards to be objective, are normally expressed
in quantitative form (e.g., amount, units, hours, thirst, kilograms, number of invoices processed,
etc.,). Still, the most objective mode of expressing standards is in terms of money.

4. Planning
As standards are set, plans could be done better. A good plan must be S. M. A.R. T.
(i.e., specific, measurable, attainable, realistic, and time-bounded). Plans must be specific to be
clear, measurable to be fair in the evaluation process, attainable to elicit outstanding
performance, realistic to allow people to relate to, and time-bounded to impress urgency and
deadlines. The design and development of a plan must be participated in by people in the
organization. This means an effective appetizer to increase one's desire in achieving an
objective. As plans are developed, men must start developing a “sense of ownership“, and
eventually, commitment. Questions such as, “what resources are needed?”, “How do we do it?”,
“When do we do it?“, “Who will do it?“, And “where do we do it?“ need to be resolved with
acceptable certainty. Planning is an act of approximating the future and preparing resources,
systems, strategies, structures and methods that could best seize the opportunities in a given
condition to increase the equity or wealth of an organization.

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a. Organizing and Directing

As plans are framed, resources are organized accordingly. Policies, systems, operational
strategies, methods and means are devised as activities are mapped-out and lined-up to
execute plans. People are trained, machines brought in, materials outsourced, systems and
standards strictly implemented, and offline and online performances monitored. Revisions of
plans may be done in-progress and remedial actions are devised and executed when
necessary. All along, acts are done in accordance with organizational plans, goals and
objectives. In this context, the importance of operational management cannot be undermined.
The effectiveness and fitness of managerial judgment are tested. Resources are not only
marshaled but are organized and operationally managed. Actions, processes, and
transformations are done to meet the objectives of the organization.

5. Controlling and Performance Evaluation

Controls are to be devised and installed prior to business and operational processes. Controls
are also done during the process. Controls are classified as feedback controls, concurrent
controls, and feedforward controls.

Feedback controls pertain to completed activities, concurrent controls refer to ongoing

processes, feedforward controls anticipate and prevent problems. Questions such as, “what
structures are best for our operation?“, “what systems and policies are best applicable under the
circumstances?”, “why are we not meeting our targets or why are we extending our targets?“,
“why are machines and men not performing as expected?”, “ what methods are applicable
under the circumstances?“, “why is the market behaving differently?“, And “why do our financial
results differ from our estimates?“ need answers.

The Budget Committee … develop an executive team!

Top executives should primarily subscribe to organizational objectives. The CEO must therefore
exercise competence in leading and managing his top executives. Top executives must not only
be capable and competent but must have “ownership“ of organizational goals. There must be
trust and openness in communication. One way to achieve this is through the creation of a
Budget Committee.

A budget committee is normally composed of top executives in the administrative, operational

and financial areas of business such as the Vice Presidents for Sales, Production,Purchasing,
Human Resources, Information Technology, Engineering and Quality, Administration, and, most
especially, Finance. The Budget Committee is also known in practice as the management
committee (i.e., MANCOM) or executive committee (i.e., EXECOM).

The Budget Committee, which is normally headed by a Budget Director, administers the
budgetary process. It is concerned at developing the budget manual that includes a budget
planning calendar and distribution instructions for all budget schedules. A budget planning
calendar is the schedule of activities for the development and production of the budget. It

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includes a list of dates indicating when the specific information is needed to be provided to other
departments or units until the entire budgetary process is completed. A budget manual includes
distribution instructions for all budget schedules to show that a segment’s budget is an input to
another department or business unit in the preparation of their own budget. Without distribution
instructions, someone who needs a particular schedule might be overlooked, and delays may
occur. A planning calendar integrates the entire budgetary activities. Along the way, men should
be educated about the purpose, forms, and processes of the budgetary system. They should be
taught how to make their own budget using the standard chart of accounts and the standardized
budget schedules, know the relevance of their schedule to another schedule, and the model of
performance evaluation. The bottom-line is, everybody should be made aware of and be
involved.

The Master Budgets … a financial process model!

Budgets are plans expressed in quantitative form, primarily in financial expression. When plans
are expressed quantitatively, they are more objective, understandable, and measurable.

The budgetary process is dependent on the organizational structure and purposes. As such, the
budget normally stay in answering the basic question, “Is there a market for the business?” This
question directs the master budgeting process to start in the sales budget. The normal
budgetary sequence is shown in figure 5.1.

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Normally, the development of business is driven by its demand. In this perspective, the
budgeting process starts from the sales budget. Once it is projected, the production budgets,
operating expenses budgets, and the budgeted statement of profit or loss follow (i.e., operating
budgets). Then, the financial budgets leading to the budgeted statement of financial position
and the budgeted statement of cash flows with supporting schedules on collections from
customers and payments to suppliers (i.e., financial budgets). The entirety of the operating and
financial budgets comprise the master budgets of the enterprise at a given level of activity in a
given business period.

If there is a limitation on organizations resources such as materials and parts, direct labor hours,
machine hours, financial, cultural, and regulatory aspects, the starting point in preparing the
master budget shall be defined by such limitation.

Types of Budget

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The types of budgets or the major composition of the master budget are:
1) The Operating budget
2) The Financial budget
3) The Capital budget

The following is a simplified subclasfficiation of the above-mentioned types of budget for a

manufacturing firm:

A. Operating Budget
1. Budgeted Income Statement
a. Sales budget
b. Production budget
1) Materials cost budget
2) Direct labor cost budget
3) Factory overhead budget
4) Inventory levels
2. Cost of Sales Budget
3. Selling and Administrative expenses budget
4. Financial Expense budget

B. Financial Budget
1. Budgeted Statement of Financial Position
2. Cash Budget

C. Capital Investment Budget

Budgeting Terminologies Defined

Budgeted Income Statement

- Refers to projection of revenue, expenses, and results of operations for a definite period
of time.

Cash budget
- A period-by-period 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.

Financial Budget
- Refers to the budget of the financial resources as reflected in the budget statement of
financial position and cash budget.

Fixed Budget
- Projection of cost at a particular or one level of production (usually at normal capacity)
for a definite time period.

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Flexible (variable) budget

- Projection of cost at different levels of production for a definite period of time

Participative budget
- Budget prepared using employees at all levels in the organization

Physical budget
- Budget that is expressed in units of materials, number of employees or number of man-
hours or service units rather than in pesos

Planning budget (static budget)

- Another term for master budget

Production budget
- Production plan of resources needed to meet current sales demand and ensure
adequate inventory levels

Program budget
- Budget for the major programs or projects that the company plans to undertake

Operating budget
- Refers to the plans for the conduct of business for the planning period; it includes the
budgeted income statement and all its supporting budgets.

Responsibility budget
- Budget for a responsibility center

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

Sales budget
- Budget that shows the quantity of each product and the revenue expected to be sold

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.

Zero-based budgeting
- A system of establishing financial plans beginning with an assumption of no-activity and
justifying each program or activity level

The Sales Budget

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Sales indicate meeting customers' wants, demands, needs, and desires. It fundamentally drives
the creation of business activities. It is the initiating motive of business organization and the
genesis of normal business planning.

Mathematically, the sales are affected by the unit sales price and quantity sold. The unit sales
price is affected by cost, competition, product substitutes, market trends, regulations, demand
and supply behavior, and estimated profit, among other things. The number of units sold is
affected by the unit sales price.

Other factors influencing sales forecast include the past sales volume, general economic and
industry conditions, relationship of sales to economic indicators (such as gross domestic
product, gross national product, personal income, employment, prices in industrial production),
relative product profitability, market research studies, advertising and other promotions, quality
of salesforce, seasonal variations, production capacity, and long-run sales trends for various
products. In forecasting sales, factors that have strong correlation with sales pattern are
identified and used.

Basically, there are three ways of making escalates for the sales budget:

a. statistical forecasting based on analysis of general business conditions, market

conditions, product growth curves, etc.
b. Make an internal estimate by collecting the opinions of executives and sales staff.
c. Analyze the various factors that affect sales revenue and then predict the future behavior
of each of these factors.

The estimated number of units sold could be estimated per product line, department,
geographical area, model, and market classification. In projecting units to be sold, several
forecasting techniques are employed which normally apply the concept of probability and best
estimates models, statistics, and simulation analysis. The study of probability and other
forecasting techniques are reserved in the chapter for quantitative techniques applied in
business.

Sample Problem 3.1. Estimated Sales in Units and Pesos

The management of New corporation is considering three state economic conditions: strong,
fair, and weak. Based on some macro studies, it has been agreed that the economy in the
coming year may be 40% strong, 50% fair and 10% weak. The projected number of units are
120,000 units, 90,000 units, and 50,000 units for strong, fair, and weak economic conditions,
respectively. The budgeted unit sales price given the estimates in units sold is P 120. Five
percent (5%) of the gross sales are estimated to be uncollectible.

Required:
1. Budgeted units to be sold in the coming year

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2. Budgeted amount of sales, net of doubtful accounts.

Solutions/ Discussions:

1. The budgeted sales in units shall be determined as follows:

Economy Projected Sales Units Probability Budgeted Unit Sales

A 120,000 40% 48,000
B 90,000 50% 45,000
C 50,000 10% 5,000
Total 93,000

2. The budgeted net sales in pesos shall be:

Budgeted sales in units 93,000
x Unit sales price P 120
Budgeted gross sales in pesos P 11,160,000
Less: Allowance for doubtful accounts
(P 11,160,000 x 5%) 558,000
Budgeted net sales in pesos P 10,602,000

Once the sales units are projected and the sales amount already budgeted, the budgeted costs
and expenses would now be estimated, then the financial budgets all in connection with the
strategic plan of the business.

In the following discussions, the unit sales price and projected sales in units are normally given.

The Production Budget

Budgeted production is based on budgeted sales and inventory policies. An inventory policy is
normally based on the number of units to be sold in the following period. The formula for the
budgeted production could be derived from the traditional method of determining number of
units sold which states that finished goods inventory-beginning plus production less finished
goods inventory-ending equal budgeted sales. You tweak the formula and the computation for
the budgeted production is as follows:

Table 3.1. Pro-Forma Budgeted Production

Projected sales x
Add: Finished goods invty - end x
Total Goods Available for Sale x
Less: Finished Goods Inventory - Beg x
Budgeted Production x

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Once the budgeted production is set, the budgeted materials, direct labor, and variable
overhead may now be prepared.

The budgeted fixed overhead is based on normal capacity (e.g., normal production) which is
considered flat or constant over the periods (e.g., months) covered by the budget. It differs from
the master budget where its level of capacity varies from one month to another.

An illustration of Budgeted Production Schedule is presented on schedule 3 of Sample Problem

3.3.

The Direct Materials Budget

The raw materials budget is based on budgeted production. There are two (2) materials budgets
to be estimated;
1. Budgeted direct materials used
2. Budgeted direct materials purchases

Budgeted direct materials used budget

Multiply the budgeted production by the standard materials per unit of finished goods and you
get the budgeted direct materials to be used, or the budgeted direct materials requirements.
This makes the standard costing system a “sine qua non” in the budgetary process.

The standard cost is used in the preparation of the direct materials budgets, direct labor,
variable overhead, fixed overhead, selling expenses, and administrative expenses budgets as
well.

Budgeted direct materials purchases budget

Direct material purchases is direct materials used add the materials inventory ending, then
deduct the materials inventory beginning.

This procedure is derived from the traditional computation of raw materials used which is raw
materials inventory-beginning plus materials purchases less raw materials inventory-ending.
From this standpoint, the raw materials purchases budgets are derived, as follows.

Table 3.2. Pro-Forma Budgeted Direct Materials Used and Purchases

Budgeted direct materials used x (Budgeted production x Std. materials per unit)
Add: Materials Inventory End x
Total Materials for Use x
Less: Materials Inventory - Beg x
Budgeted direct mat. Purchases in units x
x Materials cost per unit x
Budgeted materials purchases in pesos P x

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An illustration of Budgeted Direct Materials Used and Purchases is presented in Sample

Problem 3.4, Schedule 4.

The Direct Labor Budget

Let us assume a labor intensive operation where workers are paid by the hour. On this premise,
the budgeted direct labor hours is budgeted production times the standard direct labor hour per
unit produced. The standard direct labor rate per hour is multiplied to budgeted direct labor
hours to get the budgeted direct labor cost.

The standard direct labor hours per unit and the standard rate per hour are to be provided by
the standard cost sheet.

The pro-forma computation of the budgeted direct labor cost is as follows:

Table 3.3. Pro-Forma Budgeted Direct Labor

Budgeted Direct Labor hours x (Budgeted production x Std. DLH per unit)
x DL Rate per hour P x
Budgeted DL cost P x

The budgeted direct labor hours would determine the number of production personnel needed
to be employed for a given budgetary period.

An illustration of Budgeted Direct Labor is presented in Sample Problem 6.5, Schedule 6.

The Factory Overhead Budget

The factory overhead should be budgeted separately for the fixed overhead in the variable
overhead components.

Fixed overhead is constant in total while the standard fixed overhead rate is computed based on
the normal capacity. In short-term budgeting the standard fixed overhead rate is considered
constant.

Total variable overhead costs change in relation to the level of production while unit variable
cost is constant.

The computational guideline for the factory overhead is as follows:

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Table 3.4. Budgeted Factory Overhead Computations

Budgeted variable overhead x (Budgeted production x Std. Var OH per unit)

Budgeted fixed overhead P x (Normal capacity x Std. Fx OH rate/ unit)
Budgeted total overhead P x

The standard hours per unit and standard overhead rates per hour are to be based on the
standard cost sheet developed by the business.

An illustration of Budgeted Factory Overhead is presented in Sample Problem 6.5, Schedule 7.

The Budgeted Statement of Cash Flows

Cash may be considered as the alpha and omega of the business process. Investors interest
would boil down to the ability of the business to return their money and how much more could
be given to them as premium for accepting the risk of investing in the business.

Managers are also interested in the daily and regular cash position of the business to effectively
monitor operating activities. An analysis of cash inflows and outflows would provide
management vita information on the liquidity needs of the business. Several models of cash
management, presentation and analyses have been developed for management use, as
follows:

1. Cash budget model

2. Economic cash flow model
3. Accounting statement of cash flow model

The presentation formats of these cash report presentation models are presented in each of the
boxes in the following page.

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Fig. 6.2 Cash Report Presentation Models

Model 1 - The Cash Budget Model Model 2 - The Economic Cash Flow Model

Cash balance - begP x Cash inflows P x

Add: Cash receipts (operating Less: Cash outflows x
and investing) x Net cash inflows (outflows) x
Total cash for use x Add: Cash balance - beginning x
Less: Cash payments (operating Cash balance - end Px
and investing) x
Cash balance before financing x
+ Financing inflows (outflows) x
Cash balance - end Px

Model 3 - The Statement of Cash Flow Model

Cash from operating activities

Cash inflows from operating activities x
Cash outflows from operating activities (x) Px
Cash from investing activities
Cash inflows from investing activities x
Cash outflows from investing activities (x) x
Cash from financing activities
Cash inflows from financing activities x
Cash outflows from financing activities (x) x
Net change in cash and cash equivalents Px

The cash management model separates the operating and investing cash performance before
the financing activities. This gives the management a vital perspective on the ability of the
business activities (i.e., operating and investing) to generate cash. The financing section
includes the receipts from short-term financing and long-term financing as well. However, the
short-term financing is always prioritized for operating cash management purposes. The
financing section also includes the payments to interest, principal, and return of equity.

Cash flows are classified as financing, investing, and operating activities. This classification may
be traced from understanding the general contents of the Statement of Financial Position and
Statement of Profit or Loss.
Statement of Financial Position

INVESTING ACTIVITIES FINANCING ACTIVITIES

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Inflows Outflows Inflows Outflows

Sale of Noncurrent assets ✔ Long-term borrowing ✔
Acquisition of noncurrent ✔ Payment of long-term debt ✔
assets
Issuance of shares of stock ✔
Retirement of shares of ✔
stock
Purchase of treasury stock ✔
Re-issuance of treasury ✔
stock
Dividends paid ✔

Statement of Profit or Loss

OPERATING ACTIVITIES
Inflows Outflows
Cash sales ✔
Collections from credit customers ✔
Receipts from other revenue ✔
Cash purchases ✔
Payments to merchandise suppliers ✔
Payments to operating expenses ✔
Payments to other expenses ✔

Operating activities employ current assets and current liabilities. The difference of current assets
and current liabilities is called the working capital. It is the fundamental resource used by the
management in managing revenues, costs, and profit. As such, current items pertain to
operating activities and are excluded from financing and investing activities.

Investing activities basically refer to those of noncurrent assets and marketable securities.
Financing activities essentially relate to long-term debt and equity transactions.

Under the International Financial Reporting Standards, specifically in International Accounting

Standard No. 7, interest expense may be classified as operating or investing activities
depending on the reason of its incurrence. Accordingly, if interest expense is incurred to sustain
the operating activities of the business, such interest is classified as an operating item. If an

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interest is incurred arising from the raising of financing money, such interest is classified as a
financing item.

Dividend income may be classified as either operating or investing activity depending on the
nature of the investment from which the dividend is derived and the purpose of dividend
distribution.

An illustration for Cash Budget is presented in Sample Problem 3.7, Schedule 13.

Schedule of Accounts Receivable Collections

Credit sales are collected over a period of time. Collection patterns are to be established to
more accurately estimate the inflows of cash from operations. A schedule of Accounts
Receivable collections from credit sales is to be done. Total collections from receivables include
those from credit customers and cash sales.

Schedule of Accounts Payable Payments

Credit purchases are not usually paid in the period of purchase. Normally, payments are spread
over a number of months. A schedule of account payables payments is to be made to more
accurately determine timing of cash outflows to merchandise suppliers.

Accruals and Prepayments

There are also accrued and prepaid (deferred or unearned) income and expenses. In the
budgeted statement of cash flows, only the cash portion of the accrued and prepaid items are
considered.

Let us revisit the contents of the accrued and prepaid expenses accounts to determine the
amount of expenses paid, as shown below:

Accrued Expenses Prepaid Expenses

- + + -

PAID x Beg Bal x Beg. Bal x INCURRED x

End Bal x INCURRED x PAID x Beg Bal x

Using the T-account analysis, the “expenses-paid” would be computed as:

Operating expenses incurred P x

Add: Accrued expenses, beg. P x

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Prepaid expenses, end x x

Total
Less: Accrued expenses, end x
Prepaid expenses, beg. x x
Operating expenses paid P x

In determining the amount of income received, let us also revisit the contents of accrued and
deferred income accounts, as shown below.

Accrued Income Deferred Income

+ - - +

Beg. Bal x RECEIVED x EARNED x Beg Bal x

EARNED x End Bal x End Bal x RECEIVED x

Using the T-account analysis, the “income received” is computed as follows:

Income earned P x
Add: Accrued income, beg. P x
Deferred income, end x x
Total
Less: Accrued income, end x
Deferred income, beg. x x
Income received P x

Operating Expenses

Operating expenses budget should also be estimated in details in accordance with the
principles of accrual accounting. There shall be separate budget schedules each for marketing,
selling, and administrative expenses. It would be truly of great value if the expenses are further
classified as direct to the segment or otherwise, and controllable or noncontrollable as to the
authority of the segment manager.
Operating expenses could also be classified based on the new model of business functions
such as: research and development expenses, design engineering expenses, marketing
expenses, distribution expenses, and customer services expenses. The production costs are
assembled, grouped and reported as part of the cost of goods manufactured and sold.

Research and Development

Leading companies in their industry or line of business, or companies that operate in a

technology- based business environment, need to allocate resources for research and

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development to stay competitive and relevant in the upcoming period. Detailed research and
development budget would provide important information to managers in their strategic and
tactical decisions.

Research has at least three phases: basic research, applied research, and developmental
research. These researches are focused towards cost reduction, product improvements and
development of new products. Distribution as to the overall budget allotment to these research
phases and focuses should be clearly projected, summarized and presented.

Budgeting Models

There are several budgeting models used by organizations. Some examples are flexible
budgeting, fixed (or static) budgeting, continuous budgeting, zero-based budgeting, life-cycle
budgeting, activity-based budgeting , kaizen budgeting, and government budgeting.

Flexible budgeting separates costs as to either variable or fixed. In this model, budgeted costs
are determined at any level of business activity. Flexible budgeting uses standard costs to
prepare budgets for multiple activity levels. Total fixed costs remain constant while total variable
costs increase as production increases. The budgeted costs based on actual level of production
become the standard costs and are compared with the actual costs to get and analyze cost
variances.

An illustration of flexible budgets follows:

Sample Problem 3.2. Flexible Budgeting

Fixed or static budgeting does not segregate cost into fixed and variable components. Costs are
estimated only at a single level of activity. Actual cost are compared with the budgeted cost
regardless of the actual level of production and cost variances are obtained and analyzed
accordingly.

Continuous or rolling budgeting maintains a particular time frame (or period) covered in
budgeting (say 12 months). When a time segment (e.g., month) had passed, it is dropped from
the budget frame and a new month is added to maintain the same period of time covered by the
budget.

Zero-based budgeting (ZBB) does not consider past performances in anticipating the future.
Budgeted cost should be classified and packaged based on activities which must be prioritized
and justified as to their incurrence. The aim is to encourage objective examination of all costs in

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the hope that cost could be better controlled. ZBB starts from the lowest budgetary units of the
organization. It needs determination of objectives, operations, and costs for each activity and
the alternative means of carrying out that activity. Different levels of service or work effort are
evaluated for each activity, measurements and performance standards are established, and
activities are ranked according to their importance to the activity. A decision package is prepared
that describes various levels of service that may be provided, including at least one level lower
than the current one. Each expenditure is justified for each budget period and costs are
reviewed from a cost-benefit perspective.

Life-cycle budgeting intends to account for all costs incurred in the stages of the “value chain”,
from research and development to design, production, marketing, distribution, up to customer
services. Costing in this model is important for pricing decisions. Revenues generated from the
product should cover not only the costs of production but the entire business costs incurred. It is
also analyzed in line with the product life-cycle concept where products have four life stages
such as infancy (or start-up stage), growth stage, expansion stage, and maturity (or decline)
stage.

It is estimated that about 80% of all costs are already committed (may not yet be incurred)
before the business begins. Life-cycle budgeting emphasizes the potential for locking in
(designing in) future costs since the opportunity of reducing costs is great before production
begins. In the whole-life cost concept, the budget includes the “after-purchase costs“ closely
associated with the life-cycle cost. After-purchase costs include the costs of operating, support,
repair, and disposal incurred by customers.

Whole-life cost equals the life-cycle cost plus the after-purchase costs. Life-cycle costing is
related to target costing and target pricing. A target price is determined in a given market
condition and costs and profit margin are adjusted accordingly.

Activity-based budgeting is applied when the activity-based management system is used. It

breaks down processes into activities and permits the identification of value-adding activities
and their cost drivers. Activities are grouped according to their homogeneity and costs drivers
are established per homogeneous pool. It tracks down cost incurrence based on the behavior of
its cost driver such as number of set-ups, downtime, number of units produced, machine hours,
number of employees square footage, number of kilowatt used, number of customer complaints,
and many more.

Kaizen (continuous improvements) budgeting assumes the continuous improvement of products

or processes by way of small innovations rather than major changes. Budgets are normally not
reached unless innovative improvements occur. Kaizen budgeting is based on learning curve
theory where cost decreases as time passes by and experiences are gained. Kaizen is also
related to product life-cycle costing.

Governmental budgeting is not only a financial plan but is also an expression of public policy
and a form of control having the force of the law. A government budget is a legal document, a

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law enacted by the congress, which must be complied with by heads and personnel of various
government agencies. Since government budgeting is not profit-centered, the use of budgets in
the appropriation process is of major importance. One budgeting concept in government
budgeting is “line budgeting” where the emphasis is more on the control of expenditures. Each
line expense should be disbursed according to the limits of the approved appropriations.

APPENDIX 3.1 MASTER BUDGET SCHEDULES

This section illustrates the computations, mechanics and interrelationships in a master budget.
Although the illustrative data are presented separately per sample problem, they are however
interrelated. The concept is to individually show budgetary computations per major account and
later will be consolidated in budgeted financial statements. The data pertain to Charmaine
Corporation.

Sample Problem 3.3. Projected Sales and Estimated Collections from Customers

Charmaine Corporation made the following projections on its sales in the coming year, 2020:

Projected units sold

Economy Q1 Q2 Q3 Q4 Probability
Good 74,000 92,000 80,000 102,000 50%
Fair 50,000 80,000 70,000 90,000 30%
Bad 40,000 50,000 45,000 60,000 20%

The unit sales price is expected to be constant at P 20. All sales are made on credit.
Receivables from customers are collected 60% in the quarter of sales, 30% in the quarter
following sales, and 8% in the second quarter following sale. The remaining 2% is considered
uncollectibles. The account receivables balance on December 31, 2019 is estimated to be P
640,000; 25% of which is coming from the 3rd quarter sales of 2019.

Required:

1. Schedule 1. Projected sales in units and in pesos per quarter and for the year 2020.
2. Schedule 2. Estimated collections from customers per quarter and for the year 2020.

Solutions/ Discussions:
● The projected sales in units are computed by considering the probability of occurrence.
Expected units sold
Q1 Q2 Q3 Q4
Good (projected sales x 50%) 37,000 46,000 40,000 51,000

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Fair (projected sales x 30%) 15,000 24,000 21,000 27,000

Bad (projected sales x 20%) 8,000 10,000 9,000 12,000

60,000 80,000 70,000 90,000

(*) For example: Q1 (74,000 units x 50%) 37,000 units
Q2 (50,000 units x 30%) 15,000
Q3 (40,000 units x 20%) 8,000
Expected sales in units 60,000 units

Schedule 1. Budgeted Sales

Q1 Q2 Q3 Q4 Total
Budgeted sales in units 60,000 80,000 70,000 90,000 300,000
X Unit sales price P 20 P 20 P 20 P 20 P 20
Budgeted sales in pesos P 1,200,000 P 1,600,000 P 1,400,000 P 1,800,000 P 6,000,000

Schedule 2. Budgeted Collections from Customers

From sales of Credit sales Q1 Q2 Q3 Q4 Total

Q3, 2019 P 1,600,000 P 128,000 P 128,000

Q4, 2019 1,200,000 360,000 96,000 456,000

Q1, 2020 1,200,000 720,000 360,000 96,000 1,176,000

Q2, 2020 1,600,000 960,000 480,000 128,000 1,568,000

Q3, 2020 1,400,000 840,000 420,000 1,260,000

Q4, 2020 1,800,000 1,080,000 1,080,000

Budgeted collections from P 1,208,000 P 1,416,000 P 1,416,000 P 1,628,000 P 5,568,000

customers

● The collection pattern is 60% - 30% - 8%. The receivables are collected in 3 quarters. Sixty percent in the
quarter of sales, thirty percent in the quarter following sales, and 8% in the second quarter following sales.
● The credit sales in the third quarter of year 2019 were P 1,600,000 (i.e., P 640,000 x 25% / 10%). Ninety
percent (90%) of this sales has been collected at the end of 2019. Hence, to get the total sales from the
third quarter of 2019, we have to divide the remaining receivable from this quarter by 10%, which is the
remaining receivable balance.
● The credit sales in the fourth quarter of 2019 were P 1,200,000 (i.e., P 640,000 x 75% / 40%). Sixty
percent (60%) of this sales has been collected by the end of 2019. As such, to get the total sales, we
have to divide the remaining receivable from this quarter by 40%, which is the remaining receivable
balance.

Sample Problem 3.4. Budgeted Production, Materials Purchases, and Payments to

Suppliers

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Charmaine Corporation has the budgeted units sales of its product in 2019 up to the first quarter
of 2020 as follows:
2019 1st quarter 60,000
2nd quarter 80,000
3rd quarter 70,000
4th quarter 90,000
2020 1st quarter 75,000

The company has a policy of maintaining finished goods inventory equal to 20% of the next
quarter’s sales and materials inventory of 30% of current quarter’s requirements. It takes 3 lbs.
of material AX-23 to produce unit of product. The materials inventory at the start of the year was
recorded at 75,000 pounds.

Material AX-23 costs P 1.20 per pound to purchase. The terms of the purchase is 2/30, n/45.
The company pays 55% of its purchases in the quarter of purchase and avail of the 2% trade
discount. The remaining balance is paid in the following quarter. The accounts payables at
December 31, 2019 are valued at P 81,000.

Required: For the year 2020:

1. Schedule 3. Budgeted production per quarter and in total.
2. Schedule 4. Budgeted materials purchases per quarter and in total.
3. Schedule 5. Budgeted payments to merchandise suppliers.

Solutions/ Discussions:

Schedule 3. Budgeted Production

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted sales in units 60,000 80,000 70,000 90,000 300,000
+ Finished gods - end 16,000 14,000 18,000 15,000 15,000
Total needs 76,000 94,000 88,000 105,000 315,000
- Finished goods - beg 12,000 16,000 14,000 18,000 12,000
Budgeted sales in pesos 64,000 78,000 74,000 87,000 303,000

● Finished goods-end = 20% x next quarter’s sales

Q1 = 80,000 units x 20% = 16,000 units

Q2s = 70,000 units x 20% = 14,000
Q3 = 90,000 units x 20% = 18,000
Q4 = 75,000 units x 20% = 15,000

● Finished goods - beg = the ending of the previous quarter

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Q1 = 60,000 units x 20% = 12,000 units

● The ending inventory of the fourth quarter is the ending inventory of the year and the beginning
inventory of the first quarter is the beginning of the eyar.

Schedule 4. Budgeted Materials Purchases

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted production 64,000 78,000 74,000 87,000 303,000
x Standard materials per unit 3 lbs 3 lbs 3 lbs 3 lbs 3 lbs
Budgeted materials usages(in 192,000 234,000 222,000 261,000 909,000
lbs)
+ Materials inventory - end 57,600 70,200 66,600 78,300 78,300
Total materials needs 294,600 304,200 288,600 339,300 987,300
- Materials inventory - beg 75,000 57,600 70,200 66,600 78,300
Budgeted materials purchases 174,600 246,600 218,400 272,700 912,300
(in lbs)
x Materials cost per lb P 1.20 P 1.20 P 1.20 P 1.20 P 1.20
Budgeted materials purchases P 209,520 P 295,520 P 262,080 P 327,250 P 1,094,760
(in pesos)

Materials inventory end = 30% x Current quarter’s needs

Q1 = 192,000 units x 30% = 57,600 lbs.

Q2s = 234,000 units x 30% = 70,200
Q3 = 222,000 units x 30% = 66,600
Q4 = 261,000 units x 30% = 78,300

Schedule 5. Budgeted Payments to Merchandise Suppliers

To purchases Credit Q1 Q2 Q3 Q4 Total

of Purchases

Q4, 2019 P 180,000 P 81,000 P 81,000

Q1, 2020 209,520 112,931 P 94,284 207,215

Q2, 2020 295,520 159,501 P 133,164 292,665

Q3, 2020 262,080 141,261 117,936 259,197

Q4, 2020 327,040 176,382 176,382

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Budgeted payments to P 193,931 P 253,785 P 274,425 P 294,318 P 1,016,459

merchandise supplier

● The payment pattern is 55% - 45%. Payments to merchandise suppliers are made in 2 quarters; fifty-five
percent are paid in the quarter of purchase and forty-five percent are paid in the following quarter after
purchase.
● The credit purchases in the fourth quarter of 2019 were P 180,000 (i.e., P 81,000 / 45%). The 55% have
been paid in the quarter the purchases were made.
● The payment made to suppliers in the quarter of purchase accounting for 55% of all purchases is subject
to 2% trade discount. Example, payment made in Q1 of 2020 for purchases made in Q1 of 2020 is P
112,931 (i.e., P 209,520 x 55% x 98%). The payment made in the following quarter accounting for the
remaining 45% of the purchases is not subject to 2% trade discount.

Sample Problem 3.5. Budgeted Direct Labor and Factory Overhead

Charmaine Corporation pays its production personnel at a rate of P 20 per direct labor hour. It
takes 0.25 standard hours to complete a finished unit. The corporation pays its labor costs in the
month the payroll is recorded.

The standard variable overhead rate is P 5 per direct labor hour and the standard fixed
overhead rate is P 4 per direct labor hour. The company’s normal capacity is 75,000 units or
18,750 direct labor hours. Thirty percent (30%) of the total fixed overhead is non-cash.
Overhead costs are paid 90%in the quarter the overhead is incurred and the remainder is paid
in the month following the quarter of incurrence. The overhead costs incurred in the fourth
quarter of 2019 are P 84,000 variable and P 70,000 fixed.

The budgeted production in units for 2020 are estimated at: Q1, 64,000 units, Q2, 78,000 units;
Q3, 74,000 units, and Q4, 87,000 units.

Required: For the year 2020:

1. Schedule 6: Budgeted labor costs per quarter and in total.
2. Schedule 7: Budgeted factory overhead in quarter and in total.
3. Schedule 8: Budgeted cash payments for labor and overhead in quarter and in total.

Solutions/ Discussions:

Schedule 6. Budgeted Labor Costs

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted production 64,000 78,000 74,000 87,000 303,000
X Standard direct labor 0.25 hr 0.25 hr 0.25 hr 0.25 hr 0.25 hr
hours per unit
Budgeted direct labor 16,000 9,500 18,500 21,750 75,750
hours
X Direct labor rate per P 20 P 20 P 20 P 20 P 20
hour

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Budgeted direct labor cost P 320,000 P 390,000 P 370,000 P 435,000 P 1,515,000

Schedule 7. Budgeted Factory Overhead

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Variable factory overhead P 80,000 97,500 P 92,500 P 108,750 378,750
Fixed factory overhead 75,000 75,000 75,000 75,000 300,000
Budgeted factory overhead P 155,000 P 172,500 P 167,500 P 183,750 P 678,750

● Variable factory overhead = Production x Variable Overhead rate per DLH

Q1 = 16,000 DLH x P 5 = P 80,000
Q2s = 19,500 DLH x P 5 = 97,500
Q3 = 18,500 DLH x P 5 = 92,500
Q4 = 21,750 DLH x P 5 = 108,750

● Fixed factory overhead = Normal capacity x Fixed overhead rate per DLH
● E.g., Q1 = 18,750 DLH x P 4 = P 75,000

Schedule 8. Budgeted cash payments to labor and overhead

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Direct labor cost P 320,000 P 390,000 P 370,000 P 435,000 P 1,515,000

Factory overhead 132,550 148,250 145,500 159,625 585,925

Budgeted payments to P 452,550 P 538,250 P 515,500 P 594,625 P 2,101,200

conversion costs

a. Payments of factory overhead

Amount Q1 Q2 Q3 Q4 Total

Variable
Overhead
Q4, 2019 P 84,000 P 8,400 P 8,400
Q1, 2020 80,000 72,000 P 8,000 80,000
Q2, 2020 97,500 87,750 P 9,750 97,500
Q3, 2020 92,500 83,250 9,250 92,500
Q4, 2020 108,750 97,875 97,875
Budgeted payments to variable 80,400 95,750 93,000 107,125 376,275
overhead
Cash fixed overhead

Q4, 2019 (70,000x70%) P 49,000 P 4,900 P 4,900

Q1, 2020 (75,000x70%) 52,500 47,250 P 5,250 52,500
Q2, 2020 (75,000x70%) 52,500 47,250 P 5,250 52,500

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Q3, 2020 (75,000x70%) 52,500 47,250 5,250 52,500

Q4, 2020 (75,000x70%) 52,500 47,250 47,250
Budgeted payments to variable 52,150 52,500 52,500 152,500 209,650
overhead
Total payments to overhead P 132,550 P 148,250 P 145,500 P 159,625 P 585,925
(Thirty percent (30%) of the fixed overhead is noncash.)
(Overhead is paid 90% in the quarter incurred and 10% in the succeeding quarter.)

Sample Problem 6.6. Budgeted Statement of Profit or Loss

Consider the data and solutions in sample problems “5.3” to “5.5”. The standard costs of
Charmaine Corporation are summarized below:

Units Rate Cost per unit

Direct material 3 lbs. P 1,20 per lb. P 3.60
Direct labor 0.25 hr . 0.20 per hr. 0.05
Variable factory overhead 0.25 hr. 5.00 per hr. 1.25
Fixed factory overhead 0.25 hr. 4.00 per hr. 1.00
Total P 5.90

The standard costs are the same from year 2019 to 2020. The work-in-process inventories are
estimated at 10% of the current production put into the process. The work-in-process on
December 31, 2019 is determined at P75,000. Operating expenses are budgeted at 20% of
sales in a quarter. Non-cash operating expenses including accruals and prepayments are
estimated at 20% of sales. Other income from operations are projected at 5% of sales. The
actual of 2019 and the estimated accrued and prepaid items in 2020 are as follows:

Q4 2019 Q1 Q2 Q3 Q4
___________________________________________________
Accrued expenses P 12,000 P 15,000 P22,000 P 14,000 P 15,000
Prepaid expenses 3,000 6,000 6,500 7,400 8,800
Accrued income 4,400 900 3,500 7,900 8,600
Prepaid income 2,100 3,300 4,400 9,700 8,200
The income tax rate is 40%

Required: For the year 2020

1. Schedule 9. Budgeted cost of goods manufactured and sold.
2. Schedule 10. Budgeted statement of profit or loss.
3. Schedule 11. Budgeted cash payments to operating expenses.
4. Schedule 12. Budgeted cash receipts from other revenues.

Solutions/Discussions.

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Schedule 9. Budgeted cost goods manufactured and sold.

Reference Quarter 1 Quarter 2 Quarter 3 Quarter4 Total
Materials used Schedule 4 P 230,400 P 280,800 P 266,400 P 313,200 P 1,090,800
Direct labor Schedule 6 320,000 390,000 370,000 435,000 1,515,000
Factory overhead Schedule 7 155,000 172,500 167,500 183,750 678,750
____________________________________________________________________
Total factory cost 705,400 843,300 803,900 931,950 3,284,550
+WIP inventory, beginning 75,000 64,440 84,630 80,290 3,284,550
____________________________________________________________________
Total costs put in process 780,400 912,740 887,530 1,012,240 75,000

-WIP inventory ending 69,440 84,630 80,290 94,395 94,395

Cost of goods manufactured 710,960 828,110 808,240 917,845 3,265,155
+FG inventory, Schedule 3 70,800 94,400 82,600 106,200 70,800
beginning
_____________________________________________________________________
Total goods available for sale 781,760 922,510 890,840 1,024,045 3,335,955
-FG inventory, Schedule 2 94,400 82,600 106,200 88,500 88,500
Ending
_____________________________________________________________________
Cost of goods sold Schedule 1 P 687,360 P 839,910 P 784,640 P 935,545 3,247,455
==================================================================

● Material used = Materials used in units x Standard materials cost per unit
Q1 = 192,000 lbs. X P1.20 = P 230,400
Q2 = 234,000 lbs. X P1.20 = P 280,800
Q3 = 222,000 lbs. X P1.20 = P 266,400
Q4 = 261,000 lbs. X P1.20 = P 313,200

● The work-in-process of December 31, 2019 is the beginning work-in-process of 2020.

● Work-in-process inventory, ending = 10% x current production costs put into process.
E.g., Q1 = P694,400 x 10% = P69,440
● Finished goods inventories = FG on hand x Standard unit cost (i.e., P5.90)

Units Costs
________________ _____________
FG - beg FG - end Unit Cost FG - beg FG - end
________________________________________________________________________
Q1 12,000 16,000 P 5.90 P 70,800 P 94,400
Q2 16,000 14,000 5.90 94,400 82,600
Q3 14,000 18,000 5.90 82,600 106,200
Q4 18,000 15,000 5.90 106,200 88,500

Schedule 10. Budgeted Statement of Profit or Loss

Reference Quarter 1 Quarter 2 Quarter 3 Quarter4 Total
Sales Schedule 1 P 1,200,000 P 1,600,000 P 1,400,000 P 800,000 P 6,000,000
Cost of goods sold Schedule 9 687,360 839,910 784,640 935,545 3,247,455
-Operating expenses1 240,000 320,000 280,000 360,000 1,200,000
+other income2 60,000 80,000 70,000 90,000 300,000
____________________________________________________________________
Income before income tax 332,640 843,300 803,900 931,950 3,284,550
-income tax (40%) 133,056 208,036 162,144 237,782 741,018
____________________________________________________________________

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Profit (loss) P 199,584 P 312,054 P 243,216 P 356,673 P 1,111,527

=================================================================

1Operating expenses = 20% x Sales; 2Other income = 5% x Sales

Schedule 11. Budgeted Cash Payments to Operating Expenses

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Operating expenses incurred P 240,000 320,000 280,000 360,000 1,200,000
+ Accrued expense - beg 12,000 15,000 22,000 14,000 12,000
Prepaid expenses - end 6,000 6,500 7,400 8,800 8,800
Total 258,000 341,500 309,400 382,800 1,220,800
Less: Accrued Expenses - end 15,000 22,000 14,000 15,000 115,000
Prepaid Expenses - beg 3,000 6,000 6,500 7,400 3,000
Operating expenses paid 240,000 313,500 288,900 360,400 1,202,800

● Refer to computational guidelines. The beginning accrued expenses balance in quarter 1 (i.e., P 12,000) is
the beginning of the year. The ending prepaid expenses balance in quarter 4 is the ending balance of the
year.
● Accrued expense and expense balances do not accumulate. They are continuous and are carried from one
period to another. This observation is also true with regard to accrued income and deferred income.

Schedule 12. Budgeted Cash Receipts from Other Revenues

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Other revenues earned P 60,000 80,000 70,000 90,000 300,000
+ Accrued income - beg 4,400 900 3,500 7,900 4,400
Deferred income - end 3,300 4,400 9,700 8,200 8,200
Total 67,700 85,300 83,200 106,100 312,600
Less: Accrued income - end 900 3,500 7,900 8,600 8,600
Deferred income - beg 2,100 3,300 4,400 9,700 2,100
Other Revenues Received 64,700 78,500 70,900 87,800 301,900

Sample Problem 3.7. Budgeted Cash Flows

Consider all the data and solutions in sample problems “3.3. To 3.6”. Other cash transactions
and information are as follows:
a. Non-current assets are to be acquired in the second and third quarters of 2020 in the
amounts of P 200,000 and P 145,000, respectively. Some old non-current assets are to
be sold at its book value for P 174,000 in the third quarter.
b. Dividends are to be paid in February for P 400,000 and July for P 250,000.

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c. The minimum cash balance is set at P 400,000. In case of deficit, the corporation can
avail a credit line in multiples of P 25,000 from a financing institution at a rate of 14% per
annum. Interest is paid quarterly based on the outstanding balance at the beginning of
the quarter. Payments to borrowings in multiples of P 25,000 are made whenever cash
is available determined at the beginning of the quarter. The cash balance on January 1,
2020 is expected to equal the minimum cash balance.

Required: For the year 2020:

1. Schedule 13. Cash budget
2. Schedule 14. Budgeted Statement of Cash Flows.

Solutions/ Discussions:

Schedule 13. Cash Budget

Reference Quarter 1 Quarter 2 Quarter 3 Quarter4 Total
Cash Balance - P 400,000 P 436,219 P 469,934 P 659,009 P 400,000
Add: Cash Receipts
Collections from customers Schedule 12 1,208,000 1,416,000 1,416,000 1,628,000 5,668,000
From other revenues Schedule 12 64,700 78,500 70,900 87,800 301,900
Sale of noncurrent assets 174,000 174,000
Total cash available for use 1,672,700 1,930,719 2,130,834 2,372,809 6,543,900
_____________________________________________________________________
Less: Cash payment

Merchandise purchases Schedule 5 (193,931) (253,785) (274,425) (294,318) (1,016,459)

Direct labor Schedule 6 (320,000) (390,000) (370,000) (435,000) (1,515,000)
Factory overhead Schedule 8 (132,500) (148,250) (145,500) (159,625) ( 585,925)
Operating expenses Schedule 11 (240,000) (313,500) (288,900) (360,400) (1,202,800)
Acquisition of noncurrent assets (200,000) (145,000) - ( 345,000)
Dividends (500,000) (250,000) - ( 750,000)
Total Cash Payments (1,386,481) (1,305,535) (1,473,825) (1,249,343) (5,415,184)
Cash balance before financing 286,219 625,184 657,009 1,123,466 1,128,716
Financing Cash:
Borrowings (at beginning) 150,000 150,000
Payments to borrowings (at end) - (150,000) (150,000)
Interests paid (at end) - ( 5,250) ( 5,250)
Net financing 150,000 (155,250) ( 5,250)
Cash balance - ending 436,219 469,934 657,009 1,123,466 P 1,123,466

● Cash balance - ending = Total cash available for needs - Total cash payments + Net Financing
● The cash balance for the year is the cash balance at the beginning of the first quarter and the
ending balance of the year equals the ending balance of the fourth quarter

Schedule 14. Budgeted Statement of Cash Flows

Reference Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

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Operating activities

Collections from Customers Schedule 2 P 1,208,000 P 1,416,000 P 1,416,000 P 1,628,000 P 5,668,000

From other revenue Schedule 12 64,700 78,500 70,900 87,800 301,900

To merchandise suppliers Schedule 5 (193,931) (253,785) (274,425) (294,318) (1,016,459)

To direct labor Schedule 6 (320,000) (390,000) (370,000) (435,000) (1,515,000)

To factory overhead Schedule 7 (132,550) (148,250) (145,500) (159,625) (585,925)

To operating expenses Schedule 11 (240,000) (313,500) (288,900) (360,400) (1,202,800)

Net operating inflows (outfolws) 386,219 388,965 408,575 466,457 1,649,716

Investing activities

Sale of noncurrent assets - - 174,000 - 174,000

Acquisition of noncurrent assets - (200,000) (145,000) - (345,000)

Net investing activities - (200,000) 29,000 - (171,000)

Financing activities

Dividends paid (500,000) - (250,000) - (750,000)

Borrowings 150,000 - - - (150,000)

Payments to borrowings - (150,000) - - (150,000)

Interests paid - (5,250) - - (5,250)

Net financing activities (350,000) (155,250) (250,000) - (755,250)

Net cash inflows (outflows) 36,219 33,715 187,075 466,457 723,466

Add: Cash Balance - beginning 400,000 436,219 469,934 657,009 400,000

Cash balance - ending P 436,219 P 469,934 P 657,009 P 1,123,466 P 1,123,466

● The business needs to borrow in the first quarter of the year to maintain the minimum cash balance of P
400,000. The amount borrowed is computed as follows:
Cash balance - beginning P 400,000
Net operating cash inflows 363,769
Dividends paid (500,000)
Cash balance before financing 263,769
Minimum cash balance (400,000)
Cash need P 136,231
Borrowings (in multiples of P 25,000) P 150,000

● The cash balance at the end of the second quarter is P 426,869 which i P 26,869 in excess of the minimum
balance of P 400,000. This excess shall be used to pay borrowing in multiples of P 25,000.
● The beginnng cash balance of the first quarter is the beginning cash balance of the year, and the ending cash
balance of the fourth quarter is the ending cash balance of the year.

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References used:

Agamata, Franklin T. Management Services 2019 Edition. GIC Enterprises & Co., Inc, 2019

Cabrera, Ma. Elenita B.Management Accounting Concepts and Applications. GIC Enterprises &
Co., Inc, 2014

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