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05

BUDGETING
RHAD VIC F. ESTOQUE, CPA, MBA, CAT, MICB, RCA, CMA

Budgeting

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

I. OVERVIEW
Budgeting – is a forecasting tool to determine future sources and uses of resources. It is also a tool used for
strategic and tactical planning intended to control costs to attain customer satisfaction and become successful against its
competitors.

A. Budgets and the budgeting cycle

1. Planning- budgets are intended to help management in setting its goals and objectives

2. The budgeting cycle

a. Top level management sets the overall goals and objectives of the company.
b. Setting of basis for performance evaluation.
c. Investigating deviations or variances from plans
d. Planning in light of feeback

B. Advantages and uses of budgets

The preparation of a budget is supported by the principle of Reasonable assurance, that is benefits should be
greater than the cost.
1. Compels periodic planning
2. Basis of performance evaluation
3. Motivational tool
4. Promotes coordination within the company
5. Enhances communication within the company

C. Budget Administration
1. Benefits of budgeting will be attained if all levels in the company understand and support the budget, and the
control system
2. Top management should spearhead the preparation of the budget to attain active line-management
participation
3. The budget could be revised during the implementation phase provided it is justified and with the consent of
the Budget Committee.

D. Time frame of budgets

1. Purpose of budget will determine its time coverage
2. Long-term plans require Strategic budgets and short-term plans require Tactical budgets.

II. The Master Budget

It is the overall plan of a company.
A. Financial budget: includes cash, capital expenditure, balance sheet, and cash flows

B. The Operating budget: budgeted income statement and its supporting budget schedules
Steps in preparing the operating budget:
Step 1: Revenues budget
Step 2: Production budget (in units)
Step 3: Direct materials usage and purchases budgets
Step 4: Direct labor budget
Step 5: Manufacturing overhead budget
Step 6: Ending inventories budget
Step 7: Cost of goods sold budget
Step 8: Non-manufacturing costs budget
Step 9: Budgeted income statement

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BUDGETING

III. Other Types of Budgets

1. Kaizen budgeting
2. Activity-based budgeting
3. Static (Fixed) budget:
4. Flexible budget:

IV. Sources of information for the preparation of budgets

a. Past company records
b. Benchmark with industry competitors
c. Standards developed by company
Standard are either Attainable (Practical) or Theoretical (Ideal). Attainable standards allow
allowance for down-time and rest periods. Theoretical standards assume 100% efficiency.

Illustrative Problems
1. The controller of Joy Co. has requested a quick estimate of the manufacturing supplies needed for the Morton Plant
for the month of July when production is expected to be 470,000 units to meet the ending inventory requirements
and sales of 475,000 units. Joy Co.'s budget analyst has the following actual data for the last 3 months.
Production Manufacturing
Month in units supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560

Using these data and the high-low method to develop a cost estimation equation, how much is the estimate of
needed manufacturing supplies for July?

2. Lane Co. uses the following flexible budget formula for year, annual maintenance cost in Dept. T: Total Cost =
P7,200 + P0.60 per machine hour

The July, operating budget is based upon 20,000 hours of planned machine time. How much is the
maintenance cost included in this flexible budget for the month?

3. Based on normal capacity operations, Ingga Co. employs 25 workers in its Refining Department, working 8 hours
a day, 20 days per month at a wage rate of P6 per hour. At normal capacity, production in the
department is 5,000 units per month. Indirect materials average P0.25 per direct labor hour, indirect labor
cost is 12 1/2% of Direct labor cost; and other overhead are P0.15 per direct labor hour.

The flexible budget at the normal capacity activity level follows:

Direct materials P 4,000
Direct labor 24,000
Fixed factory overhead 1,200
Indirect materials 1,000
Indirect labor 3,000
Other overhead 600
Total P 33,800
Cost per unit P 6.76

How much is the cost per unit at 60% capacity?

4. CC Company's total costs of operating five sales offices last year were P500,000, of which P70,000
represented fixed costs. CC has determined that the number of sales offices operated significantly
influences total costs. Last year's costs and number of sales offices can be used as the bases for
predicting annual costs. What would be the budgeted costs for the coming year if CC were to operate seven sales
offices?

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BUDGETING

5. Barnes Corporation expected to sell 150,000 board games during the month of November, and the company's
master budget contained the following data related to the sale and production of these games
Revenue P2,400,000
Cost of goods sold
Direct materials 675,000
Direct labor 300,000
Variable overhead 450,000
Contribution margin 975,000
Fixed overhead 250,000
Fixed selling and administrative 500,000
Operating income P225,000
=======
Actual sales during November were 180,000 games. Using a flexible budget, how much is the
expected operating income for the month of November?

6. MC Company is budgeting sales of 53,000 units of product N for October. The manufacture of one unit of N
requires 4 kilos of chemical L. during October, MC plans to reduce the inventory of L by 50,000 kilos and
increase finished goods inventory of N by 6,000 units. There is no work in process. How many kilos of L is MC
budgeting to purchase in October?

7. The Lending Corporation has the following historical pattern on its credit sales:
70% collection during the month of sale
15% in the first month after sale
10% in the second month after sales
4% in the third month after sale
1% uncollectible
The sales on account of the last six months of the year were reported as follows:
July P120,000
August 140,000
September 160,000
October 180,000
November 200,000
December 170,000

Cash collections in October amounted to?

8. The following purchase budget was prepared by Masagana Corp.

Month Budgeted Purchases (Pesos)
January 460,000
February 380,000
March 400,000
April 440,000
May 420,000

Purchases are paid for in the following manner:

10% in the month of purchase.
50% in the month after purchase.
40% two months after purchase.

Total disbursements for the period March to May amount to?

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BUDGETING

9. The following information were made available for Futuristic, Inc.:

June 30, cash balance, P900,000
Dividends paid in July, P240,000
Cash expenditures in July for operating expenses, P736,000
Depreciation expense in July P90,000
Cash collections in July, P1,780,000
Merchandise purchases paid in cash in July , P1,124,000.
Purchased equipment for cash in July, P350,000.

It was the company's policy to keep a minimum cash balance of P200,000. The company:
a. Had to borrow P200,000
b. Did not borrow since its ending cash balance amounted to P200,000
c. Did not borrow with its ending cash balance amounting to P230,000
d. Had to borrow P60,000

10. Rain Co. has budgeted activity for April. Selected data from estimated amount are as follows:
Net Income P120,000
Increase in gross amount of accounts receivable
during the month 35,000
Decrease in accounts payable during month 25,000
Depreciation expenses 65,000
Provision for income taxes 80,000
Provision for doubtful accounts receivable 45,000

On the basis of the above data, how much is the budgeted cash increase for the month?

11. A 20x4 cash budget is being prepared for the purchase of Toy, a merchandise item. Budgeted data are:
Cost of goods sold for 20x4 P300,000
Accounts payable 1/1/20x4 20,000
Inventory - 1/1/20x4 - 12/31/20x4
30,000 42,000

Purchase will be made in 12 equal monthly amounts and paid for in the following month. What are the 20x4
budgeted cash payment for purchases of Toy?

12. In preparing its budget for July, Zen Co. has the following accounts receivable information available:
Accounts receivable at June 30, P350,000
Estimated credit sales for July, P400,000
Estimated collections in July for credit sales in July and prior months, P320,000
Estimated write-offs in July for uncollectible credit sales, P16,000
Estimated provision for doubtful accounts for credit sales in July, P12,000

What was the projected balance of accounts receivable in July 31?

13. Broker Corp.'s master budget shows straight-line depreciation on machinery of P516,000 based on the annual
production volume of 103,200 units of product. In July, it produced 8,170 units of product, and the accounts had
actual depreciation on machinery of P41,000. It controls manufacturing costs with a flexible budget. The
flexible budget amount for depreciation on machinery for July is?

14. It is budgeting time for Del Co. The following assumptions were agreed upon for the next year after a strategic
planning session which covered a five year horizon:

(1) Sales is estimated to be at 70,000 units at its national selling price of P126.00. 75% of total sales are on
credit. 1.5% of net sales is provided for doubtful accounts
(2) sales discount are given to various customers at different rates and net to gross ratio is at 93%
(3) Mark-up on merchandise is at 45% of invoice cost. Beginning inventory is P80,900 and is expected to be
reduced by P15,000 at the end of the period
(4) Selling and administrative expenses is expected to be 15% of gross sales
(5) Depreciation is computed at P500,000

The projected operating income for the year is?

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BUDGETING

Exercises
1. If ABC Company developed the following sales forecasts and associated probabilities:
Sales Forecast Probability
P400,000 10%
P550,000 40%
P600,000 35%
P720,000 15%

The expected value of sales is

A) P578,000 B) P555,000 C) P2,220,000 D) P1,110,000

2.Thirty percent of Sharp Company's sales are for cash and 70% are on account. Sixty percent of the account sales are
collected in the month of sale, 25% in the month following sale, and 12% in the second month following sale. The
remainder is uncollectible. The following are budgeted sales data for the company:

January February March April

Total sales .............. P50,000 P60,000 P40,000 P30,000

Total cash receipts in April are expected to be:

A) P24,640 B) P35,200 C) P31,560 D) P33,640

3.Razz Company is estimating the following sales:

July ......................... P45,000

August .................... P50,000
September .............. P65,000
October................... P80,000
November ............... P75,000
December ............... P60,000

Sales at Razz are normally collected as follows: 10% in the month of sale; 60% in the month following the sale;
and the remaining 30% in the second month following the sale. In Razz's budgeted balance sheet at December
31, at what amount will accounts receivable be shown?
A) P49,500 B) P76,500 C) P120,500 D) P135,500

4. On January 1, Colver Company has 6,500 units of Product A on hand. During the year, the company plans to sell
15,000 units of Product A, and plans to have 5,000 units on hand at year end. How many units of Product A must
be produced during the year?
A) 13,500 B) 16,500 C) 15,000 D) 20,000

5. Douglas Company plans to sell 24,000 units of Product A during July and 30,000 units during August. Sales of Product
A during June were 25,000 units. Past experience has shown that end-of-month inventory should equal 3,000
units plus 30% of the next month's sales. On June 30 this requirement was met. Based on these data, how many
units of Product A must be produced during the month of July?
A) 28,800 B) 22,200 C) 24,000 D) 25,800

6. Villi Manufacturing Corporation's most recent sales budget indicates the following expected sales (in units):

July August September

Expected unit sales ............... 230,000 275,000 310,000

Villi wants to maintain a finished goods inventory of 20% of the next month's expected sales. How many units
should Villi plan on producing for the month of August?
A) 268,000 units B) 282,000 units C) 291,000 units D) 337,000 units

7. Sharp Company, a retailer, plans to sell 15,000 units of Product X during the month of August. If the company has
2,500 units on hand at the start of the month, and plans to have 2,000 units on hand at the end of the month, how
many units of Product X must be purchased from the supplier during the month?
A) 14,500 B) 15,500 C) 15,000 D) 17,000

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BUDGETING

8. The following are budgeted data:

January February March

Sales in units......................... 15,000 20,000 18,000
Production in units ................ 18,000 19,000 16,000

One pound of material is required for each finished unit. The inventory of materials at the end of each month
should equal 20% of the following month's production needs. Purchases of raw materials for February should be:
A) 19,600 pounds B) 20,400 pounds C) 18,400 pounds D) 18,600 pounds

9. Rhett Company manufactures and sells dress shirts. Each shirt (unit) requires 3 yards of cloth. Selected data from
Rhett's master budget for next quarter are shown below:
April May June
Budgeted sales (in units) ....................................................... 26,000 28,000 32,000
Budgeted production (in units) ............................................... 28,000 32,000 36,000
Desired ending inventory of cloth (in yards) ........................... 2,100 2,800 3,000

How many yards of cloth should Rhett plan on purchasing in May?

A) 84,700 yards B) 96,700 yards C) 98,100 yards D) 98,800 yards

10. Sparks Company has a cash balance of P7,500 on April 1. The company must maintain a minimum cash balance
of P6,000. During April, cash receipts of P48,000 are planned. Cash disbursements during the month are
expected to total P52,000. Ignoring interest payments, during April the company will need to borrow:
A) P3,500 B) P2,500 C) P6,000 D) P4,000

11. For May, Young Company has budgeted its cash receipts at P125,000 and its cash disbursements at P138,000.
The company's cash balance on May 1 is P17,000. If the desired May 31 cash balance is P20,000, then how
much cash must the company borrow during the month (before considering any interest payments)?
A) P4,000 B) P8,000 C) P12,000 D) P16,000

Home Company will open a new store on January 1. Based on experience from its other retail outlets, Home
Company is making the following sales projections:
Cash Sales Credit Sales
January ..................... P60,000 P40,000
February ................... P30,000 P50,000
March........................ P40,000 P60,000
April .......................... P40,000 P80,000

Home Company estimates that 70% of the credit sales will be collected in the month following the month of sale, with the
balance collected in the second month following the month of sale.

12. Based on these data, the balance in accounts receivable on January 31 will be:
A) P40,000 B) P28,000 C) P12,000 D) P58,000

13. The March 31 balance in accounts receivable will be:

A) P100,000 B) P60,000 C) P95,000 D) P75,000

14. In a cash budget for the month of April, the total cash receipts will be:
A) P74,000 B) P57,000 C) P114,000 D) P97,000

Roberts Company manufactures home cleaning products. One of the products, Quickclean, requires 2 pounds of
Material A and 5 pounds of Material B per unit manufactured. Material A can be purchased from the supplier for P0.30 per
pound and Material B can be purchased for P0.50 per pound. The finished goods inventory on hand at the end of each
month must be equal to 4,000 units plus 25% of the next month's sales. The raw materials inventory on hand at the end of
each month (for either Material A or Material B) must be equal to 80% of the following month's production needs.

15. Assume that on January 1 the inventory of Quickclean was 8,000 units. Expected sales in January are 14,000
units and expected sales in February are 18,000 units. The number of units needed to be manufactured in
January would be:

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BUDGETING

A) 10,500 B) 14,000 C) 14,500 D) 15,000

16. Assume that the production budget calls for 26,000 units of Quickclean to be manufactured in June and 32,000
units of Quickclean to be manufactured in July. On May 31 there will be 41,600 pounds of Material A in inventory.
The number of pounds of Material A needed for production during June would be:
A) 61,600 B) 51,200 C) 35,600 D) 52,000

17. Assume that the production budget calls for 26,000 units of Quickclean to be manufactured in June and 32,000
units to be manufactured in July. On May 31 there will be 104,000 pounds of Material B in inventory. The number
of pounds of Material B to be purchased during June would be:
A) 128,000 B) 130,000 C) 154,000 D) 160,000

The TS Company has budgeted sales for the year as follows:

Quarter 1 Quarter 2 Quarter 3 Quarter 4
Sales in units ............. 10,000 12,000 14,000 16,000

The ending inventory of finished goods for each quarter should equal 25% of the next quarter's budgeted sales in units.
The finished goods inventory at the start of the year is 2,500 units. Four pounds of raw materials are required for each unit
produced. Raw materials on hand at the start of the year total 4,200 pounds. The raw materials inventory at the end of
each quarter should equal 10% of the next quarter's production needs in material.

18. Scheduled production for the third quarter should be:

A) 14,500 units B) 18,500 units C) 15,500 units D) 13,500 units

19. Scheduled purchases of raw materials for the second quarter should be:
A) 50,000 pounds B) 55,800 pounds C) 50,800 pounds D) 55,000 pounds

Sarter Corporation is in the process of preparing its annual budget. The following beginning and ending inventory levels
are planned for the year.
Beginning Inventory Ending Inventory
Finished goods (units) ................. 70,000 20,000
Raw material (grams) .................. 50,000 60,000

Each unit of finished goods requires 3 grams of raw material.

20. If the company plans to sell 880,000 units during the year, the number of units it would have to manufacture
during the year would be:
A) 900,000 units B) 930,000 units C) 880,000 units D) 830,000 units

21. How much of the raw material should the company purchase during the year?
A) 2,550,000 grams B) 2,490,000 grams C) 2,480,000 grams D) 2,500,000 grams

Dilbert Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:

• Sales are budgeted at P260,000 for November, P230,000 for December, and P210,000 for January.
• Collections are expected to be 80% in the month of sale, 19% in the month following the sale, and 1% uncollectible.
• The cost of goods sold is 65% of sales.
The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of
sale. Payment for merchandise is made in the month following the purchase.
Other monthly expenses to be paid in cash are P20,300.
Monthly depreciation is P20,000.
Ignore taxes.
Statement of Financial Position
October 31

Assets
Cash ................................................................................................... P 27,000
Accounts receivable
(net of allowance for uncollectible accounts) .................................. 79,000
Inventory ............................................................................................. 101,400
Property, plant and equipment
(net of P574,000 accumulated depreciation) .................................. 1,082,000
Total assets ........................................................................................ P1,289,400

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BUDGETING

Liabilities and Stockholders’ Equity

Accounts payable ............................................................................... P 169,000
Common stock .................................................................................... 740,000
Retained earnings............................................................................... 380,400
P1,289,400

22.Expected cash collections in December are:

A) P230,000 B) P184,000 C) P233,400 D) P49,400

23. The cost of December merchandise purchases would be:

A) P141,700 B) P169,000 C) P81,900 D) P149,500

24. December cash disbursements for merchandise purchases would be:

A) P141,700 B) P149,500 C) P157,300 D) P81,900

25. The excess (deficiency) of cash available over disbursements for December would be:
A) P55,800 B) P37,900 C) P93,700 D) P17,900

26. The net income for December would be:

A) P60,200 B) P37,900 C) P40,200 D) P55,800

27. The cash balance at the end of December would be:

A) P180,500 B) P153,500 C) P82,800 D) P27,000

28. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
A) P46,000 B) P93,100 C) P43,700 D) P81,300

29. Accounts payable at the end of December would be:

A) P81,900 B) P141,700 C) P59,800 D) P149,500

30. Retained earnings at the end of December would be:

A) P380,400 B) P418,300 C) P471,300 D) P466,400

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