Financial

Forecasting
 Table of contents

01 02
Objectives of Nature of Financial
the Firm Forecasting

03 04
Projected
Steps in Financial Financial
Forecasting Statement Method
 Objectives of the Firm

Social and
Community
Financial Goals Goals
It refers to shareholder It pertains to providing
wealth maximization benefits to its
vis-à-vis through profit community thorugh
maximization pollution control,
equitable hiring
practices and fair trade
and pricing standards.
Nature of Financial Forecasting

It allows the firm to anticipate

events before they occur,
particularly the need for
raising funds externally.
Steps in Financial
Forecasting

1. How much money will be firm need

during a given period?
2. How much money will the firm
generate internally or through
operations during the same
period?
3. How much additional funds or
external financing will be required?
 To estimate external
financing required, the
projected or pro forma
financial statement
method or the formula
method may be used.
 Projected Financial Statement Method

1 3
Forecast the Raising the
Statement of additional funds
Comprehensive needed
Income

2 4
Forecast the Consider Financing
Statement of Feedback
Financial Position
 Forecast of Statement of
Comprehensive Income
1. Establish a sales projection.

2. Prepare the production schedule and project the corresponding

production costs: direct material, direct labor and overhead.

3. Estimate selling and administrative expenses.

4. Consider financial expenses, if any.

5. Determine the net profit.

 Illustration: Sale Projection
The management of New Corporation is considering a three state
economic conditions: strong, fair, and weak. Based on some macro
studies, it has been agreed that the economy on 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 estimate in units sold is P 120. five percent
(5%) of the gross sales are estimated to be uncollectibles.

Required:
1. Budgeted units to be sold for the coming year.
2. Budgeted amount of net sales, net of doubtful accounts.
 Solution: Sales Projection

Economy Projected Sales

Units Probability
in Units

A 120,000 40% 48,000

B 90,000 50% 45,000

C 50,000 10% 5,000

Total 98,000
 Solution: Sale Projection
The budgeted net sales in pesos shall be:

Budgeted sales in units 98,000

x: Unit sales price P 120
Budgeted gross sales in pesos P 11,760,000
Less: Allowance for Doubtful Accounts
(P 11,760,000 x 5%) 588,000
Budgeted net sales in pesos P 11,172,000
 Budgeted Production
Projected Sales x
Add: Finished goods inventory – end x
Total goods available for sale x
Less: Finished goods inventory - beg x
Budgeted production x
 Budgeted Direct Materials
Budgeted DM 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 DM purchases (units) x
X: materials cost per unit x
Budgeted DM purchases (pesos) x
 Budgeted Direct Labor
Budgeted Direct labor hours x
X: DL rate per hour x
Budgeted DL cost x
 Budgeted Factory Overhead
Budgeted Variable Overhead x
Budgeted Fixed Overhead x
Budgeted Total Overhead x
Illustration: Budgeted Production
Charmaine Corporation has the budgeted units sales of its product in 2020 up
to the first quarter of 2021 as follows:

2020 1st quarter 60,000

2nd quarter 80,000
3rd quarter 70,000
4th quarter 90,000
2021 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.
Illustration: Budgeted Production
Material Ax-23 costs P 1.20 per pound to purchase is 2/30, /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 payable at December 31, 2020 are valued at P 81,000.

Required: For the year 2021:

1. Budgeted production per quarter and in total.
2. Budgeted materials purchases per quarter and in total.
3. Budgeted payments to merchandise suppliers.
 Solution: 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

Add: Finished goods, end 16,000 14,000 18,000 15,000 15,000

Total needs 76,000 94,000 88,000 105,000 315,000

Less: Finished goods, beg 12,000 16,000 14,000 18,000 12,000

Budgeted production 64,000 78,000 74,000 87,000 303,000

 Solution: 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: Std. materials/unit 3 lbs. 3 lbs. 3lbs. 3 lbs. 3 lbs.

Budgeted DM used (lbs) 192,000 234,000 222,000 261,000 909,000

DM inventory, end 57,600 70,200 66,600 78,300 78,300

Total DM needs 249,600 304,200 288,600 339,300 987,300

DM inventory, beg 75,000 57,600 70,200 66,600 75,000

Budgeted DM purchased
174,600 246,600 218,400 272,200 912,300
(lbs.)
 Solution: Budgeted Materials Purchases

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted DM purchased
174,600 246,600 218,400 272,200 912,300
(lbs.)

X: DM cost per lb. P 1.20 P 1.20 P 1.20 P 1.20 P 1.20

Budgeted DM purchases
P 209,520 P 295,920 P 262,080 P 326,640 P 1,094,760
(pesos)
 Illustration: Budgeted DL and FOH
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 and P 70,000 fixed.
 Illustration: Budgeted DL and FOH
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. Budgeted Direct labor costs per quarter and in total
2. Budgeted Factory Overhead in quarter and in total
 Solution: 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: Std. DL hours/unit 0.25 hr. 0.25 hr. 0.25 hr. 0.25 hr. 0.25 hr.

Budgeted DL hours 16,000 19,500 18,500 21,750 75,750

DL rate per hour P 20 P 20 P 20 P 20 P 20

Budgeted DL cost 320,000 390,000 370,000 435,000 1,515,000

 Solution: Budgeted Factory Overhead

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Variable Factory
P 80,000 P 97,500 P 92,500 P 108,750 P 378,750
Overhead

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

Illustration: Budgeted Statement of
Profit or Loss
Consider the data and solutions in previous illustrations. 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 FOH 0.25 hr. 5.00 per hr. 1.25

Fixed FOH 0.25 hr. 4.00 per hr. 1.00

Total P 5.90
Illustration: Budgeted Statement of
Profit or Loss

The standard costs are the same from year 2020 to 2021. The work
in process inventories are estimated at 10% of the current
production put into process. The work-in-process on December 31,
2019 is determined at P 75,000. Operating expenses are budgeted at
20% of sales in a quarter. Non-cash operating expenses including
accruals and prepayments are estimated at 20% 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:
 Illustration: Budgeted Statement of
Profit or Loss
Quarter 4
Quarter 1 Quarter 2 Quarter 3 Quarter 4
(2019)

Accrued expenses P 12,000 P 15,000 P 22,000 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

Total

The income tax rate is 40%.

Illustration: Budgeted Statement of
Profit or Loss
Required: For the year 2021:
1. Schedule 9: Budgeted cost of goods manufactured and sold
2. Schedule 10: Budgeted Statement of Profit or Loss
 Solution: Budgeted COGM
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Materials used P 230,400 P 280,800 P 266,400 P 313,200 1,090,800

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

Factory overhead 155,000 172,500 167,500 183,750 678,750

Total factory costs 705,400 843,300 803,900 931,950 3,284,550

+: WIP, beginning 75,000 69,440 84,630 80,290 309,360

Total costs put into process 780,400 912,740 887,530 1,012,240 3,592,910

-:WIP, ending 69,440 84,630 80,290 94,395 328,755

COGM 710,960 828,110 808,240 917,845 3,265,155