BUDGETING
Budget
– is a detailed plan outlining the acquisition and use of financial and
other resources over some given time period. The act of preparing a
budget is called budgeting. The use of budgets to control a
company’s activities is known as budgetary control.
Advantages of Budgeting
1. Provides a disciplined approach to problem identification and
problem solving.
2. Provides a sense of direction and purpose to all levels of
management
3. Enhances coordination of business activity
4. Provides a vehicle to enlist the ideas and cooperation of levels of
management
5. Provides a yardstick or standard that can be used to evaluate actual
performance and gauge the managerial judgment and ability of
individual executives.
Master Budget
- is a summary of all phases of a company’s plans and goals for
the future. It sets specific targets for sales, production,
distribution, and financing activities, and it generally culminates
in a projected statement of net income and projected statement
of cash position. It represents a comprehensive expression of
management’s plans for the future and how these plans are to be
accomplished.
Components of MASTER BUDGET
1. Operating Budget ( Budgeted Income Statement )
a. Sales Budget
b. Production Budget
Direct Materials Budget
Direct Materials Usage Budget
Direct Materials Purchase Budget
Direct Labor Budget
Factory Overhead Budget
Inventory Level Budget
c. Cost of Goods Sold Budget
d. Operating Expenses Budget
2. Financial Budget ( Budgeted Balance Sheet )
a. Cash Budget
b. Capital Expenditure Budget
Illustration of Master Budget
The following illustrations is of the final budget itself, but remember
that the master budget process generates key top-management decisions
regarding pricing, product lines, production scheduling, capital
expenditures, research and development, management assignments, and
so on. The first draft of the budget almost always leads to decision that
prompt further drafts before a final budget is chosen.
BASIC DATA, ASSUMPTIONS, & REQUIREMENTS
The Sapphire Company uses a normal cost system. The company is
ready to prepare its master budget for 2012. After carefully examining all
relevant factors, the executives expect the following for 2012.
Materials
P1.20 per
Material A piece
P2.60 per
Material B piece
P2.05 per
Direct Labor hour
Overhead is applied on the basis of direct
labor hours
Finished Products (content of each unit)
Product
Chey Product Jobe
Material A 12 pieces 12 pieces
Material B 6 pieces 8 pieces
Direct Labor 14 hours 20 hours
Additional Information for the year 2012
Product Product
Chey Jobe
Expected Sales in units 5000 1000
P164.0
Selling price per unit P105.40 0
Desired ending inventory units 1100 50
beginning inventory units 100 50
Material Material
A B
beginning inventory units 5000 5000
Desired ending inventory units 6000 1000
The Balance Sheet for the year just ended is given below
ASSETS
Current Assets
Cash 10,000.00
Accounts Receivable 25,000.00
Materials 19,000.00
Finished Goods 14,480.00 68,480.00
Fixed Assets
Land 50,000.00
Building & Equipment 380,000.00
Accumulated Depreciation (75,000.00) 355,000.00
Total Assets 423,480.00
EQUITIES
Current Liabilities
Accounts Payable 8,200.00
Income Taxes Payable 5,000.00 13,200.00
Stockholder's Equity
Common Stock, no par, 5,000 350,000.00
shares outstanding
Retained Earnings 60,280.00 410,280.00
Total Equities 423,480.00
Note that Work-in Process is negligible and maybe ignored.
At anticipated volume levels, the following costs will be incurred:
Factory Overhead:
Supplies 30,000.00
Indirect Labor 70,000.00
Payroll fringe costs 25,000.00
Power-variable portion 8,000.00
Maintenance - variable portion 20,000.00
Depreciation 25,000.00
Property Taxes 4,000.00
Property Insurance 500.00
Supervision 20,000.00
Power-fixed portion 1,000.00
Maintenance - fixed portion 4,500.00
208,000.00
Selling & Administrative:
Sales Commission 20,000.00
Advertising 3,000.00
Sales Salaries 10,000.00
Travel 5,000.00
Clerical Wages 10,000.00
Supplies 1,000.00
Executive Salaries 21,000.00
Miscellaneous 5,000.00
75,000.00
Budgeted Cash Flows are:
Quarters of the Year 1 2 3 4
125,000 150,000 160,000 221,000.
Collection - customers .00 .00 .00 00
Disbursements:
20,000 35,000 35,000 44,200.
3Materials .00 .00 .00 00
Other costs & 25,000 20,000 20,000 27,000.
expenses .00 .00 .00 00
90,000 95,000 95,000 109,200.
Payroll .00 .00 .00 00
5,00
Income taxes 0.00 - - -
20,000.
Machinery purchases - - - 00
The company desires to maintain P15,000 minimum cash balance at the
end of each of the first three quarters, but increased working capital
requirements at the end of the year 2012 will necessitate a minimum
ending balance of P40,000. Money can be borrowed or repaid in multiple
of P500 at an interest rate of 6% per annum. Management does not want
to borrow any more cash than necessary and want to repay as promptly
as possible. In any event, loans should not extend beyond four quarters.
Interest is computed and paid only when principal s repaid. Assume
borrowings take place at the beginning and repayments at the end of the
quarters in question. Interest is to be computed to the nearest peso.
Required:
Prepare the Master Budget for the year 2012. The following detailed
schedules must be included
Problem 1
Peak sales for Head and Shoulder Co, a wholesale distributor of leaf rakes,
occur in August. Sales the company’s planning budget for the third
quarter are shown below:
July August September Total
Budgeted Sales on account P600,000 P900,000 P500,000 P2,000,00
0
From past experience, the company has learned that 20% of a month’s
sales are collected in the month of sale, another 70% are collected in
the month following sale and the remaining 10% are collected in the
second month following sale. Bad debts are negligible and can be
ignored. May sales totaled P430,000 and June sales totaled P540,000.
Required: a) Prepare a schedule of expected cash collections from sales,
by month
b) Compute the accounts receivable as September 30.
Problem 2
Sunsilk Corporation has budgeted sales of its microchips for next four
month as follows:
Units Sold
April 20,000
May 25,000
June 35,000
July 40,000
The company is preparing a production budget for the second quarter.
Ending inventory level must equal 20% of the next month’s sales.
Required: a) Calculate the ending inventory as of March 31.
b) Prepare a production budget for the second quarter by month
and in total.
Problem 3
Palmolive Company sells a single product. Each unit takes two pounds of
material and costs P3.00 per pound. Company A has prepared a
production budget by quarters for Year 2 and for the first quarter of Year
3, as follows:
Year Year 3
2
First Second Third Fourth First
Budgeted production 30,000 60,000 90,00 100,000 50,000
0
The ending inventory at the end of a quarter must be equal to 25%
of the following quarter’s production needs. 26,000 pounds of
material are on hand to start the first quarter of Year 2. Purchases
are paid for 40% in the quarter of purchase and 60% in the
following quarter.
Required: a) Prepare direct materials budget for the chips by quarter and
in for Year
2 in total including the PESO amount of purchases.
b) Prepare cash disbursements budget for the chips by quarter
and in for Year 2 in total including the PESO amount of
purchases.
Problem 4
The production department of the Clear Company has submitted the
following forecast of units to be produced by quarter for the upcoming
fiscal year.
First Secon Third Fourth
d
Units to be produced 8,000 7,500 7,000 9,500
Each unit requires 0.4 direct labor-hours. Direct labor rate is P10.00 per
hour.
Required: Prepare the direct labor budget for the upcoming
fiscal year.
Problem 5
The budgeted direct labor-hours for the Cream Silk Company are as
followed:
First Secon Third Fourth
d
Budgeted direct labor 15,00 16,500 16,00 15,500
hours 0 0
Cream Silk Company’s variable manufacturing overhead rate is
P1.50 per direct labor-hour and the company’s fixed
manufacturing overhead is P60,000 per quarter. The only non-
cash item included in the fixed mfg. overhead is depreciation,
which is P18,000.
Required: a) Prepare a manufacturing overhead budget for the
year.
And calculate amounts used for cash disbursements
b) Compute the total manufacturing overhead rates for
the year.
Problem 6
Rejoice Company had cash of P13,000 on hand on January 1. During
the year, the company expected the following cash collections from
customers by quarter:
First Second Third Fourth
Cash collections 110,000 177,500 183,700 136,000
Direct materials purchases in tons were budgeted as follows:
First Second Third Fourth
Direct materials
purchases 65,000 75,000 55,000 50,000
The production budget showed the following unit production by
quarter with an average labor rate of P40.00:
First Second Third Fourth
Units to be produced 1,500 2,000 1,700 1,500
Rejoice Company planned to pay dividends of P10,000 per quarter during
the year. During July, new equipment costing P60,000 will be purchased.
An additional P16,000 was planned to installation costs during the fourth
quarter.
The company was required to maintain a minimum cash balance of
P15,000. A line of credit was available for short-term borrowings in
increments of P1,000. All borrowings will be made at the beginning of a
quarter and repaid at the end of a quarter. Interest on the short-term
borrowings will be paid at 0.5% per quarter on the amount repaid in
any quarter when a loan repayment is made. All other interest expense
will be accrued each quarter.
Required: Prepare a cash budget by quarter and for the year in
total.