GOOD AFTERNOON

CLASS!!!
Budgeting (Part 1)
By: Edelwin Fajutagana
INTENDED LEARNING OUTCOME:
After reading this modules, you should be able to:
• appreciate the objectives and purpose of budgeting;
• identify the components of the operating budget; and
• understand how to prepare a pro forma budgeted income
statement.

Budgeting
Definition of Budget
• Budget is a detailed plan, expressed in quantitative
terms, about business operations for a specific period.
• A budget is a useful tool for planning and controlling
company expenses, cash flows, and earnings.
• The term budgeting is used to denote the process of
coming up with budgets during a certain future period of
time.

Budgeting
Budgeting Versus Financial Planning
Budgeting is the process of creating a plan to spend your
money.
Financial Planning is the process of estimating the capital
required and determining it’s competition. It is the process of
framing financial policies in relation to procurement,
investment and administration of funds of an enterprise

Budgeting
Objectives and Functions of Budgeting
• The primary objective of budgeting is to motivate men in the
organization by providing them the right working environment.
• The processes of motivating men in a budgetary environment
follow the following steps:
1. Communication and coordination
2. Standard-setting
3. Planning
4. Monitoring of activities
5. Performance evaluation

Budgeting
Major Functions of Budgeting
Planning:
The entire budgeting process involves planning – from the
development of ideas, setting of goals, selection of strategies,
programs and procedures in attaining such goals, up to the preparation
of the format budget. Planning provides the basis of the second major
function of budgeting – control.

Budgeting
Major Functions of Budgeting
Control:
The control function of budgeting involves the comparison of actual
results of operations with the budgeted figures. The objectives is not
merely to minimize costs but also to monitor activities and take the
necessary corrective action if any, when variances between actual
results and planned figures are noted.

Budgeting
Advantages of Budgeting

1. It forces managers to plan for the future

2. It provides a means of communicating management's plans
throughout the entity
3. It directs the activities toward the achievement of organizational
goals
4. It coordinates the activities of the entire entity by integrating plans of
various parts
5. It provides a means of allocating resources to segments efficiently
and effectively
6. It defines goals that serve as benchmarks for evaluating subsequent
performance
Budgeting
Limitations of Budgeting

1.Considerable time and costs are required

2.Budgets are merely estimates that require judgment and
might be modified or revised if necessary
3.A successful budgetary system requires the cooperation
of all members of the organization
4.Budgets sometimes restrict the flexibility of the
decision-making process
5.The budget program is merely a guide, not a substitute
for good management ability
Budgeting
Master Budget

• Master budget is a comprehensive budget that consolidates

the overall plan of the organization for a specified period.
• Typically, the master budget is for a 1-year period,
corresponding to the fiscal year of the company.
• The master budget is mainly composed of:
• Operating budgets; and
• Financial budgets
• The master budget is also referred to as pro forma budget,
planning budget, forecast budget, master profit plan.
Budgeting
Master Budget

Illustration 1:

Budgeting
Operating Budget

• Operating budgets describe the income-generating activities of a firm.

• The ultimate outcome of the operating budgets is a pro forma or budgeted income
statement.
• Operating budget consists of the following:
1. Sales budget
2. Production budget
• Direct materials budget
• Direct labor budget
• Factory overhead budget (Variable and Fixed)
3. Ending finished goods inventory budget
4. Budgeted cost of goods sold
5. Budgeted operating expenses
6. Budgeted income statement
Budgeting
Financial Budget

• Financial budget consists of the following:

1. Budgeted Balance Sheet
• Cash budget
2. Capital Expenditures budget
3. Budgeted Statement of changes in Financial Position

Budgeting
Operating Budget

• Operating budgets describe the income-generating activities of a firm.

• The ultimate outcome of the operating budgets is a pro forma or budgeted income
statement.
• Operating budget consists of the following:
1. Sales budget
2. Production budget
• Direct materials budget
• Direct labor budget
• Factory overhead budget (Variable and Fixed)
3. Ending finished goods inventory budget
4. Budgeted cost of goods sold
5. Budgeted operating expenses
6. Budgeted income statement
Budgeting
Financial Budget

• Financial budgets detail the inflows and outflows of cash and the overall
financial position.
• Planned cash inflows and outflows appear in the cash budget.
• The expected financial position at the end of the budget period is shown in a
pro forma or budgeted balance sheet.
• Financial budget consists of the following:
1.Cash budget
2.Budgeted balance sheet
3.Budgeted cash flow statement
4.Capital expenditure budget
5.Working capital budget
Budgeting
Master Budget

Budgeting
Master Budget

Illustration:

Production Budget

Budgeting
Master Budget

Computation of Production Budget:

Budgeted sales (Volume) XX
Add: Ending Inventory XX
Total Goods Available for Sale XX
Less: Beginning Inventory XX
Budgeted Production XX

Budgeting
Master Budget

Illustrative Case:
Budgeted sales for the first six months of 2019 of a company are listed below:

It has a policy of maintaining an inventory of finished goods equal to 40% of the next month’s
budgeted sales. If the company plans to produce 6,000 in June, what are the budgeted sales for
July?

* Ending inventory of June is a beginning inventory for July

Budgeting
Master Budget

Illustrative Case:
Budgeted sales for the first quarter of the year are shown below:

The company has a policy that requires the ending inventory in each period to be 10% of the
following period’s sales. Assuming that the company follows this policy, what quantity of
production should be scheduled for February?

Budgeting
Master Budget

Raw Materials Budget:

Budgeting
Master Budget

Direct Labor Budget:

Budgeting
Master Budget

Illustrative Case:
A company manufactures card tables. The company has a policy of maintaining a finished goods
inventory equal to 40% of the next month’s planned sales. Each card table requires 3 hours of
labor. The budgeted labor rate for the coming year is P13 per hour. Planned sales for the months
of April, May, and June are 4,000, 5,000, and 3,000 units respectively. What is the budgeted direct
labor cost for May?

Budgeting
Master Budget

Factory Overhead Budget:

Budgeting
Master Budget

Selling Expense Budget:

Budgeting
Master Budget

General and Administrative Budget:

Budgeting
Master Budget

Illustrative Case:
A company manufactures toy airplanes. Information on its labor costs follow:
Sales commission P5 per plane
Administration P10,000 per month
Indirect factory labor P3 per plane
Direct factory labor P5 per plane
The following information applies to the upcoming month of July:
Budgeted production 1,200 units
Budget sales 1,000 units
What amount of budgeted labor cost would appear in the July selling, general, and administrative
expense budget?

Sales commission (P5 x 1,000 units) 5,000

Administrative Expense 10,000
Total Selling and G&A Expense 15,000

Budgeting
Master Budget

Cash Budget Budget:

Budgeting
Master Budget

Illustrative Case:
A company has the following expected pattern of collections on credit sales: 70% collected in the
month of sale, 15 percent in the month after the month of sale, and 14% in the second month after the
month of sale. The remaining 1 percent is never collected. At the end of May, the company has the
following accounts receivable balances:
From April sales P21,000
From May sales P48,000
The company’s expected sales for June are P150,000. How much cash will the company expect to
collect in June?

For June Sales: (P150,000 x 70%) - 105,000

For May Sales: (P48,000/30%) x 15% - 24,000
For April Sales: (P21,000/15%) x 14% - 19,600
Total collection in June 148,600

Budgeting
Master Budget

Illustrative Case:
For the month of October, a company predicts total cash collections to be P1 million. Also for October,
it estimates that its beginning cash balance will be P50,000 and that it will borrow cash in the amount
of P70,000. If the company estimates an ending cash balance of P30,000 for October, what must its
projected cash disbursements be?

Beginning cash balance 50,000

Collections P1,000,000
Borrowings 70,000
Total cash available P1,120,000
Ending cash balance 30,000
Disbursements P1,090,000

Budgeting
 Budgeting Models:
•A budget prepared for one level of activity within a certain period.
• Static Budget •Also known as fixed budget.

•A budget prepared for different levels of activity within a certain period.

• Flexible Budget •Also known as variable budget or sliding scale budget.

•A 12-month budget that rolls forward one month as the current month is
completed.
• Continuous Budget •Also known as perpetual budget.

•A method of budgeting in which managers are required to justify all costs

as if the programs involved were being proposed for the first time.
• Zero-based Budget
•A process wherein budgets are prepared by top management with little or
no inputs from operating personnel.
• Imposed Budget •A process wherein budget are developed thru joint decision making by
top management and operating personnel.

• Participatory Budget Budgeting

END
 “Whenever you want to achieve something, keep your
eyes open, concentrate and make sure you know exactly
what it is you want. No one can hit their target with their
eyes closed.”
– Paulo Coelho
Thank you
And
keep safe