MAS-05: BUDGETING

BUDGET - is a detailed plan, expressed in quantitative terms, about business operations for a
specific budget is a useful tool for planning and controlling company expenses, cash flows and
earnings term budgeting is used to denote the process of coming up with budgets.
ADVANTAGES & LIMITATIONS OF BUDGETING
Uses/Advantages of Budgeting

 It forces managers to plan for the future.

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

Limitations of budgeting
 Considerable time and costs are required.
 Budgets are merely estimates that require judgement and might be modified or revised if
necessary.
 A successful budgetary system requires cooperation of all members of the organization.
 Budgets sometimes restrict the flexibility of the decision-making process.
 The budget program is merely a guide, not a substitute for good management ability.

THE MASTER BUDGET MASTER BUDGET - is a comprehensive budget that consolidates the
overall plan of the organization for a specified period. The master budget is mainly
composed of: (1) operating budgets and (2) financial budgets. The master budget, in
some organizations, is also referred to as pro forma budget, planning budget, forecast
budget, master profit plan.

MASTER BUDGET

A) OPERATING BUDGET
 Sales budget
 Production budget
a. Direct materials budget
b. Direct labor budget
c. Factory overhead budget
 Budgeted cost of goods sold
 Budgeted operating expenses
 Budgeted net income
 Budgeted income statement
B.) FINANCIAL BUDGET

 Cash budget
 Budgeted balance sheet
  Budgeted cash flow statement
 Capital expenditure budget
 Working capital budget

TERMINOLOGIES USED IN BUDGETING

FIXED BUDGET- A budget prepared for a one level of activity within a certain period. (other
term: static budget)
FLEXIBLE BUDGET- A budget prepared for different levels of activity within a certain period.
(other terms: variable budget, sliding scale budget)
CONTINUOUS BUDGET- A 12-month budget that rolis forward one month as the current
month is completed (other term: perpetual budget)
ZERO-BASED BUDGETING- 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
IMPOSED BUDGETING- A process wherein budgets are prepared by top management with
little or no inputs from operating personnel
PARTICIPATORY BUDGETING- A process wherein budgets are developed through joint
decisions by top management and operating personnel
BUDGET COMMITTEE- A group of key management person responsible for over-all policy
matters relating to the budget program and for coordinating the budget
preparation
BUDGET MANUAL- This describes how a budget is prepared and includes a planning
calendar and distribution instructions for all budget schedules.

EXERCISES: BUDGETING
1. X-men Company has budgeted sales at P 100,000 and expects a profit of 10% of the sales.
Expenses are estimated as follows: selling = 10% of sales; administrative = 15% of sales. Labor
is expected to be 40% of the total manufacturing costs. Factory overhead is to be applied at
75% of direct labor costs. Inventories are to be as follows:
January 1 December 31
Materials P 4,000 P 1,500
Work-in-process P 2,500 P 5,000
Finished goods P 3,000 P 8,000

REQUIRED: Determine the following:

1. Cost of goods sold
2. Total manufacturing cost
3. Factory overhead
4. Materials purchases

2. Past collections experienced by Phoenix Company indicate that 60% of the net sales billed in
a month are collected during the month of sales, 30% are collected in the following month, and
10% are collected in the second following month. A record of monthly net sales of previous
months is as follows:
 November P 450,000 March P 500,000
2018
December P 460,000 April P 550,000
2019
January P 480,000 May P 600,000
2019
February P 420,000 june P 700,000

November P 450,000 March P 500,000 2018 December P 460,000 April P 550,000 2019 May P
600,000 2019 February P 420,000 June P 700,000 January P 480,000
On January 1, 2019, the accounts receivable balance showed P 229,000.
REQUIRED: Determine the following:

 Cash collections on accounts receivable during:

1. January 2019
2. March 2019
3. May 2019
 Accounts receivable balance at the end of:
4. February 2019
5. April 2019
6. June 2019
(Adapted: AICPA)
SOLUTION GUIDE
Schedule of 2019 Monthly Collections

Months Net sales Januar February Marc April May June

y h
November P 450,000
December P 460,000
January P 480,000
February P 420,000
March P 500,000
April P 550,000
May P 600,000
June P 700,000
TOTAL collections

Analysis Schedule of 2019 Monthly Accounts Receivable

January February March April May June

AR, beginning
+ Net sales P480,00 P420,000 P500,000 P550,00 P600,000 P700,000
0
-Collections
AR, ending

3. The sales manager of Magneto Merchandising has budgeted the following sales for the 3rd
quarter of 2019:
 July P 123,500
August P 156,000
September P 208,000

Other budgeted estimates are:

 All merchandises are to sell at its invoice cost plus 30% mark-up.
 Beginning inventories of each month are budgeted at 40% of that particular month's
projected cost of goods sold.
REQUIRED: Determine the following:
1. Projected merchandise purchases for the month of July.
2. Projected merchandise purchases for the month of August.
(Adapted: Managerial Accounting by Warren)
4. The following information is taken from Xavier Corporation's accounting records for the recent
year. These data would be used as the basis for the next year's cash budget.
A) Customer sales receipts for P 870,000
B) Purchased machinery and equipment for P 125,000 cash.
C) Settled income taxes of P 110,000
D) Sold investment securities for P 500,000.
E) Paid dividends of P 600,000.
F) Received rentals of P 105,000.
G) Issued 500 shares of common stock for P 250,000.
H) Paid a sum of P 100.000 due to suppliers and payroll to employees.
I) Purchased real estate for P 50,000 cash that was borrowed from a bank.
J) Paid P 450,000 for treasury shares.
REQUIRED: Determine the following:
1. Net cash provided by operating activities.
2. Net cash used in investing activities.
3. Net cash used in financing activities.
4. Net cash increase or decrease.
(Adapted: AICPA)

WRAP-UP EXERCISES (Multiple-Choice Questions)

1. The master budget usually begins with the
a. Production budget
b. Operating budget
c. Financial budget
d. Sales forecast

2. All of the following are considered operating budgets, EXCEPT

a. Cash budget
b. Sales budget
c. Purchases budget
d. Production budget
3. The production budget process usually begins with the
a. Sales budget
b. Direct labor budget
c. Direct materials budget
 d. Manufacturing overhead budget
4. Which of these budgets is usually prepared first?
a. Production budget
b. Materials purchases budget
c. Cash disbursements budget
d. Cash budget
5. Which of the following budgets is based on many other master budget components?
a. Direct labor budget
b. Overhead budget
c. Sales budget
d. Cash budget
6. A company uses a comprehensive planning and budgeting system. The proper order for
the company to prepare certain budget schedules would be:
a. Cost of goods sold, balance sheet, income statement, and statement of cash flows
b. Income statement, balance sheet, statement of cash flows, and cost of goods sold
c. Statement of cash flows, cost of goods sold, income statement, and balance sheet
d. Cost of goods sold, income statement, balance sheet, and statement of cash flows
7. Hawaii Inc. has projected sales to be P 260,000 in June, P 270,000 in July and P
300,000 in August. Hawaii collects 30% of a month's sales in the month of sale, 50% in
the month following the sale, and 20% in the second month following the sale. What is
the accounts receivable balance on August 31?
a. P 90,000
b. 210,000
c. 264,000
d. Some other number
8. Arizona Inc. has projected sales: February, P 10,000; March, P 9,000; April, P 8,000;
May, P 10,000 and June, P 11,000. Arizona has 30% cash sales and 70% sales on
account. Accounts are collected 40% in the month following the sale and 55% collected
the second month. What would be the total cash receipts in May?
a. P 3,000
b. P 8,150
c. P 8,705
d. Some other number
9. The Ohio Company has the following historical pattern on its credit sales:
70% collected in the month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
The sales on open account have been budgeted for the last six months of 2019 are
shown below:
July P 60,000
August 70,000
September 80,000
October 90,000
November 100,000
December 85,000
 What would be the estimated total cash collections during the fourth calendar quarter
from sales made on open account within the fourth calendar quarter?
a. P 172,500
b. P 230,000
c. P 251,400
d. P 265,400
10. Nevada Company manufactures a single product. The company keeps inventory of raw
materials at 50% of the coming month's budgeted production. Each unit of product
requires 3 pounds of materials. The production budget is (in units): May, 1,000; June,
1,200; July, 1,300; August, 1,600. Determine the raw materials purchases in July,
a. 1,450 pounds
b. 2,400 pounds
c. 3,900 pounds
d. Some other number
11. Philadelphia Company has budgeted sales of 24,000 finished units for the forthcoming
6-month period. It takes 4 lbs. of direct materials to make one finished unit. Given the
following:
Finished Units Direct Materials (pounds)
Beginning inventory 14,000 44,000
Target ending inventory 12,000 48,000

How many pounds of direct materials should be budgeted for purchase during the 6-month
period?
a. 92,000
b. 88,000
c. 96,000
d. 100,000
12. Florida Co. has projected sales to be P 60,000 in January, P 75,000 in February, and
P 80,000 in March. Florida wants to have 25% of next month's sales needs on hand at
the end of a month.
If Florida has an average gross profit of 40%, what are the February purchases?
a. P 30,500
b. P 45,750
c. P 46, 250
d. P 76, 250

13. Michigan Co. is preparing its cash budget for the next month based on the following
projections:
Sales P1,500,000
Gross Profit Rate 25%
Decrease in Inventories (P 70,000)
 Decrease in Accounts Payable for Inventories + P 120,000
What will be the estimated cash disbursements for inventories?
a. P 935,000
b. P 1,050,000
c. P 1,055,000
d. P 1,175,000
14. Texas company has prepared the flexible budget formula for production costs =
340,000+9x, where X is the number of units produced. Texas produced 20,000 units at
a total cost of P 490,000.
What is the variance of actual costs from budgeted costs (i.e., budget variance)?
a. P 150,000 favorable
b. P 30,000 favorable
C. P 30,000 unfavorable
d. P 90,000 unfavorable
15. The use of standard costs in the budgeting process signifies that an organization has
most likely implemented a
a. Capital budget
b. Flexible budget
c. Zero-based budget
d. Static budget