Forecasting Short-term

Operating Financial
Requirements
 Expected Learning Outcomes
After Studying Chapter 10, you should be able to:
1.Understand the relationship between financial
planning and control.
2. Know the nature, purposes and limitations of the
budget.
3. Enumerate the types of budget.
4. Understand and apply the step in developing a
master budget.
 Financial Planning
and Control Process
Financial Planning - Involves making projections of
sales, income and asset based on alternative production
and marketing strategies and then deciding how to meet
the forcasted financial requirements.
Financial Control - moves on to the implementation
phase dealing with the feedback and adjustment process
that is required (a) to ensure that plans are followed and,
(b) to modify existing plans in response to changes in the
operating environment.
Budgeting - is the act of preparing a
budget. 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
organizations wishes to achieve and the
cost of attaining these goals. The use of
budgets to control a firm's activities is
known as budgetary control.
THE PURPOSES OF THE BUDGET

A budget is a description in quantitative -

usually monetary - terms of a desired
future result. The process of preparing the
budget requires management at all levels
to focus on the future of the business
entity.
The benefits that may be realized from a budgeting
program are
1. Defining broad objectives and goals and
formulating strategies to achieve such objective;
2. Coordinating the activities by integrating the
plans of the various part thereby pulling every
one in the same direction;
3. Allocating resources to those parts of the
organization where they can be used most
effectively;
4. Communicating management's approved
plans throughout the organization;
5. Uncovering and preparing for potential
bottleneck in the operations before they occur;
6. Motivating managers to achieve the desired
results; and
7. Setting a standard or benchmark for
eveluating actual performance.
 TYPES OF BUDGETS

The types of budgets or the major

composition of the master budget are:
1. The Operating Budget
2. The Financial Budget
3. The Capital Investment Budget
A. Operating Budget
1. Budget Income Statement
a. Sales budget
b. Production budget
• Material cost budget
• Direct labor cost budget
• Factory overhead budget
• 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
3. Budgeted Statement of Sources and
Uses of Funds

C. Capital Investment Budget

 STEPS IN DEVELOPING A MASTER BUDGET
The major steps in developing a Master Budget may be
outlined as follows:
1. Establish basic goals and long-range plans for the company. These
will serve as quidelines in the preparation of budget estimates.
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of goods sold and operating expense
4. Determine the effect of budgeted operating results on assets,
liabilities and ownership equity accounts. The cash budget is the
largest part of this step, since changes in many asset and liability
accounts will depend upon the cash flow statement.
5. Summarize the estimated data in the form of a projected income statement for
the budget period and the projected statement of financial position as of the
end of budget period
Sales Budget
• The sales budget showing what
products will be sold in what quantities
at what prices, is the foundation on
which all other short-term budget are
built.
The sales forecast is made after consideration
of the following factors.
1. Past sales volume
2. General economic and industry conditions
3. Relationship of sales to economic indicators
4. Relative product profitability
5. Market research studies and competition
6. Pricing, advertising and other promotion policies
7. Production capacity
8. Quality of sales force
9. Seasonal variations
10. Long-term sales trends for various products
 For Gilbert Company, the Sales Budget is
presented as follows:
Sales Budget
For 20X5

Units Price Per Total Sales

Unit Revenue

Estimated 6,400 800 P

5,120,000
Sales
Production
Budget
• After the sales budget has been set, a
decision can be made on the level of
production that will be needed for the
period to support sales and the
production budget can be set as well.
 Production Budget
For 20x5

Units to be sold
6,400
Add: Desired ending Inventory 1,000
Total
7,400
Less: Beginning Inventory 900
Units to be produced 6,500
Raw Materials Budget
After determining the number of units to be produced, the Raw materials
Purchases can now be prepared, as follows:
Direct Labor
Budget
The Direct labor is therefore budgeted
as follows:

Number of units to be produced 6,500

Multiply by: Direct labor cost per unit 146
Total Budgeted direct labor co 949,000
Overhead Costs Budget
Budgeted Cost of Sales
The budgeted Cost of Sales Statement can now
be developed using the data from the following:
Production Budget Schedule 2
Raw Materials Budget Schedule 3
Direct Labor Budget Schedule 4
Overhead Cost Budget Schedule 5
Budgeted Statent of
Cost Of Sale Schedule 6
Marketing and Administrative Expense
Budget
Cash Budget
Cash Receipts
Normally, the bulk of a firm's cash receipts come from customers.
The possibility of cash from other sources (such as additional
investments, sales of assets, borrowings) should likewise be
considered when cash receipts are being budgeted.

Cash Disbursements
Data converted from individual budgets previously illustrated supply
the basic information for the cash disbursements budget. However,
various adjustments and additions will have to be made when
preparing the budget for prepayments, accruals as well extraneous
items (such as the purchase of new equipment, dividend payment)
that do not show up in any of the individual budgets already prepared.
Budgeted Income Statement
Budgeted Statement of Financial
Position
A picture is worth a thousand words

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