MIDTERM 1: BUDGETARY PLANNING ❖ ESSENTIAL OF EFFECTIVE BUDGETING

❖ WHY AND HOW DO ORGANIZATION CREATE ✓ Effective budgeting defends on a sound

BUDGETS? organizational structure in which authority and
Budgets are used for two distinct purposes. responsibilities overall phases of operation are
1. Planning - involves developing goals and clearly defined.
preparing various budgets to achieve those ✓ Budgets based on research and analysis should
goals. result in realistic goals that will contribute to the
2. Control - involves gathering feedback to ensure growth and profitability of the company.
that the plan is being properly executed as ✓ The effective of a budgeting program is directly
circumstances change. related to its acceptance by all level of
To be effective, a good budgeting system must managements.
provide for both planning and control. Good ❖ LENGTH OF THE BUDGETED PERIOD
planning without effective control is a waste of time ✓ The most common budget period is one year,
and effort. but a budget may be prepared for any period of
➢ A budget is a formal written summary ( or time. The annual budget is often supplemented
statement) of managements plan for specified by monthly and quarterly budgets.
time period, expressed in financial term. ✓ A continuous twelve – month budgets results
➢ It normally represent the primary means of from dropping the months just ended and
communicating agreed upon objectives adding a future months.
throughout the business organization. ❖ THE BUDGETING PROCESS
➢ Accounting information makes major ➢ The budget committee is headed by a budget
contribution to the budgeting process. director and usually includes the President,
❖ BENEFITS OF BUDGETING treasurer, chief accountant ( controller) and
✓ It require all levels of management to plan management personnel from each major area of
ahead. the company.
✓ It provides definite objectives for evaluating ➢ The budget is developed within the framework of
performance. a sale forecast that shows potential sales for the
✓ It create an early warning system for potential industry and the sale company’s expected share
problems. of such sales.
✓ It facilitates the coordination of activities within ❖ SALE FORECASTING INVOLVES
the business. CONSIDERATION OF SUCH FACTOR AS
✓ It results in greater management awareness of • General economic condition
the entity’s overall operation. • Industry trend
✓ It contribute the positive behavior pattern • Market research studies
throughout the organization. • Anticipated advertising and promotion
• Previous market share
 • Changes in prices ❖ TWO CLASSES OF BUDGETS IN THE
• Technological developments. MASTER BUDGETS.
❖ BUDGETING AND HUMAN BEHAVIOUR ➢ OPERATING BUDGET- includes the individuals
✓ A budget can have a significant effect on human budgets that cultimate in the preparation of the
behavior. budgeted income statements.
✓ A budget may have a strong positive influence ➢ FINANCIAL BUDGET- includes the cash budget
on a manager when: and budgeted balance sheet. These budgets
✓ Each level of management is invited and focus primarily on the cash resources needed to
encouraged to participate in developing the found expected operation and planned capital
budget expenditures.
✓ The budget has the complete support of top ❖ SALE BUDGET
management and it is an important basis for ➢ The first budget to be prepared
evaluating performance. ➢ Each of the budget depend on sales budgets
✓ Criticism of the managers performance is ➢ It is derived from the sale forecast and it
tempered with advice and assistance. represent managements best estimate of sale
✓ Top management is sensitive to the behavioral revenue for the budget period.
implication of its actions. ➢ The sale budget is prepared by multiplying the
❖ BUDGETING AND LONG – RANGE PLANS expected units ale volume for each product by
➢ Budgeting and long range plan are not the it’s anticipated unit selling price.
same. The maximum length of a budget is ❖ PRODUCTION BUDGET
usually a years, while long range planning ➢ Shows the units that must be produced to meet
usually encompasses at least five years. anticipated sales
➢ With budgeting the emphasis is on the ➢ A realistic estimates of ending inventory is
achievement of specific short-term goals. Long – essential in scheduling in production
range planning is a formalized process of requirements.
selecting process( strategies) to achieve long ❖ DIRECT MATERIAL BUDGET
term goals and developing policies and plans to ➢ Contain both the quantity and cost of direct
implement strategies. Long –range contains materials to be purchased.
considered less detail than budgets. ➢ It is derived from the direct materials units
❖ The MASTER BUDGET required for production (per production budgets)
➢ The master budget is a budget or set of plus the desired material units less the
interrelated budgets that constitutes a plan of beginning direct materials units.
action for a specific time period. Regarded as a ❖ DIRECT LABOR BUDGETS
comprehensive financial planning tools that ➢ Contains the quantities (hours) and cost of direct
highlight operating budgets, budgeted financial labor necessary to meet production
statement and a financial plan. requirements.
❖ MANUFACTURING OVERHEAD BUDGETS ➢ This budgets indicates the expected profitability
➢ Shows the expected manufacturing overhead of operation and it provide a basis for evaluating
cost for the budget period. company performance.
➢ This budget distinguished between fixed and ❖ CASH BUDGETS
variables overhead cost . The manufacturing ➢ Shows anticipated cash flows
overhead budget contains all manufacturing ➢ Because cash is so vital in a company, this
costs other than direct materials and direct budgets is often considered to be most
labor. The information in this budget becomes important output in preparing financial budgets.
part of the cost of goods sold line item in the ➢ The cash budgets is composed of four main
master budget. The total of all costs in this section:
budget are converted into a per-unit overhead [Link] cash receipts section
allocation, which is used to derive the cost of [Link] cash disbursements sections
ending finished goods inventory, and which in [Link] cash excess or deficiency section
turn is listed on the budgeted balance sheet. [Link] financing section.
The information in this budget is among the 1. The receipt section list all of the cash flows ,
most important of the various departmental except from financing expected the budgets period.
budget models, since it may contain a large Generally , the major source of receipt is from
proportion of the total amount of a company's sales.
expenditures. Includes expected receipt from cash sale ,
❖ SELLING AND ADMINISTRATIVE BUDGETS collection from customers, interest and dividends,
➢ The selling and administrative expense budget and the proceeds from sale of assets and stock.
is comprised of the budgets of all non- 2. The disbursement section summarize all cash
manufacturing departments, such as the sales, payment that are planned for the budget period.
marketing, accounting, engineering, and These payments includes:
facilities departments. In aggregate, this budget • Raw materials
can rival the size of the production budget, and • Direct labor payments
so is worthy of considerable attention. The • Manufacturing overhead cost
budget is typically presented in either a monthly And soon as contained in their respective budgets
or quarterly format. It may also be split up into In addition , other disbursement such as equipment
segments for a separate sales and marketing purchases and dividend are listed.
budget and a separate administration budget. 3. If a cash deficiency exist during any budget
❖ BUDGET INCOME STATEMENTS period that is less than the minimum required cash
➢ The important end- product in preparing balance , the company will need to borrow money
operating budgets. Conversely, if there is a cash is excess during any
budget period that is greater than the minimum
required cash balance, the company can invest the
excess funds or repay principal and interest to ❖ SERVICE ENTERPRISES
lenders. If a firm is overstaffed:
4. The financing section of the cash budgets Labor cost will be disproportionately high
details the borrowing and principal and interest Profit will be lower because of the additional
repayment projected to take place during the salaries
budget period Staff turnover will increase because of lack of
❖ BUDGET BALANCE SHEET challenging work
➢ Is a projection of financial position at the end of If an enterprise is understaffed:
a budget period. Revenue may be lost because existing and
➢ It is developed from the budgeted balance sheet prospective clients needs for service cannot met
for the preceding year and the budget for the Professional staff may seek other position because
current year. of excessive work loads
❖ BUDGETING IN NONMANUFACTURING ❖ BUDGETING IN NOT – FOR PROFIT
COMPANIES ORGANIZATION
➢ Budgeting is not limited to manufacturing ➢ Budgeting is just as important for not for profit
companies. Budget may also be used in profit organization as for profit oriented enterprise .
planning by ➢ In most cases, no for profit entities budgets on
• Merchandising companies the basis of cash flows ( expenditure and
• Service enterprise receipts) rather than on a revenue and
• Not – for profit organization expenses basis.
❖ BUDGETING IN MERCHANDISING ➢ The starting point in the budgeting process is
COMPANIES usually expenditure, not receipts
➢ The major difference between the budgets of a ILLUSTRATION
merchandising company and a manufacturing Mahle Manufacturing is preparing budgets for the
company are that a merchandiser. quarter ending September 30.
➢ Uses a merchandising purchases budget Budgeted sale for the next five months are :
instead of a production budget. • JULY : P20,000 units
➢ Does not use manufacturing budgets ( direct • AUGUST: 50,000 units
materials, direct labor and manufacturing • SEPTEMBER: 30,000 units
overheads • OCTOBER: 25,000 units
❖ BUDGETING IN SERVICE ENTERPRISES • NOVEMBER: 15,000 units
➢ In service enterprises, such as public accounting • The selling price is P10.00 per units
firm, a law office, or medical practice , the critical All sale are on account.
factor in budgeting is coordinating professional • 70% collected in the month of sale
staff needs with anticipated service. • 25% collected in the month following sale
• 5% uncollectibles
• June 30 account receivable of P30,000 will be Company has a no lay policy, workers are paid
collected in full. at the rate of P10.00 per hour regardless of the
[Link] management wants ending inventory to be hours worked.
equal to 20% of the following budgeting sale in • For the next three months , the direct labor
units, workforces will be paid for a minimum of 1,500
[Link] June 30, 4000 Units were on hand hours per months.
3. Manufacturing overhead is applied to units of Other information:
products on the basis of direct labor hours • Annual interest rate for all borrowing is 16%
[Link] variable manufacturing overhead rate is • Maintain a minimum cash balance of P30,000.
P20.00 per direct labor hour. • Borrow on the first day of the month and repay
[Link] fixed manufacturing overhead is P50,000 loan on the last day of quarter.
per month , which includes P20,000 of non cash • Pay a cash dividend of P49,000.
cost ( primarily depreciation of plants assets) • Purchases P143,700 OF equipment August , and
[Link] variable selling and administrative expenses 48,300 in September( both purchases paid in
are P0.50 per unit sold cash)
[Link] fixed selling and administrative expenses • Cash balance on July 1 of P40,000.
are P70,000 per month. ( the fixed selling and • The company reported the following account
administrative expenses includes P10,000 in cost ( balance prior to preparing budget financial
primarily depreciation – that are not ah flow of the statement.
current month)
• Land – 50,000
• At Mahle Manufacturing five pounds of materials
• Retained earning -146,150 ( July 1)
are required per unit of product .management
• Common stock – 200,000
wants material on hand at the end each month
• Equipment – 175,000
equal to 10% of the following month production.
• On June 30, 13,000 pounds of material are on
hand.
• Material cost is P0.40 per pound.
• The company pay P0.40 per pound for its
material.
• One-half of a month purchases is paid for the
month of purchases, the other half is paid in the
following month.
• The June 30, account payable is P12,000.
• At the Company each units of product requires
0.05 hours ( 3minutes of direct labor). For the
purposed of the illustration , assume that the