CHAPTER 3

SHORT-TERM BUDGETING

A budget is a financial plan that tracks your income and expenses over a specific period of time. It's a
way to ensure that you can cover your expenses and stay on track with your savings. It is also a plans
future saving and spending as well as planned income and expenses.
Budgeting may be carried out by individuals or by companies to estimate whether or not they can
continue to operate with its projected income and expenses.
The act of preparing a budget is called budgeting. The use of budgets to control a firm’s activities is
known as budgetary control.
A master budget is the central financial planning document that includes how a company will spend and
how much it expects to earn in a fiscal year. A master budget contains budgets of departments within the
organization and projections that allow for management to plan for the upcoming year.
The Budgetary System
The CEO’s mission is to achieve set objectives, or else their role is at risk. To succeed, they must develop
strategies to engage people and optimize resources. Winning people’s support is key, which requires
encouraging employee involvement and securing their commitment to organizational goals.
These could be done through the process of budgeting, which has the following uses:
1. Communication
This involves aligning budgeting goals with the organization’s vision, mission, and strategic objectives.
Effective communication ensures that everyone involved in the budgeting process understands the
purpose and long-term goals. Clear goals set a direction and create a shared understanding, which is
critical for consistent decision-making.
2. Motivation
When employees feel that their perspectives are valued, they’re more likely to engage actively and
contribute to the budgeting goals. Inclusivity can lead to higher morale, better collaboration, and
increased ownership over budgetary decisions. The budget may be used as a target for managers to aim
for. Reward should be given for operating within or under budgeted levels of expenditure. This acts as a
motivator for managers.
3. Standards
Setting realistic and motivational standards is crucial for maintaining efficiency in budgeting. Standards
provide a benchmark for performance evaluation and help in guiding efforts towards desired financial
outcomes. In budgeting, standards could include cost controls, revenue targets, and resource allocation
guidelines that encourage teams to meet specific targets.
4. Planning
Planning involves forecasting and approximating future financial needs and income. This step is about
making informed assumptions on revenue, expenses, and other financial factors. Accurate planning helps
organizations to anticipate potential challenges and opportunities, allowing for a proactive approach to
resource allocation and risk management. A good plan must be S.M.A.R.T. (specific, measurable,
attainable, realistic, and time-bounded.
5. Organizing and Directing
Resources are allocated based on the established plans. Policies, systems, strategies, and methods are
created to guide activities, ensuring they align with the overall objectives. This process includes training
personnel, bringing in necessary equipment, outsourcing materials, and enforcing standards. Both online
and offline performance are closely monitored. Adjustments to plans may be made as needed, and
corrective actions are implemented when issues arise. Effective organizing and directing ensure that every
part of the organization is working in sync with the budgetary goals.
6. Controlling and Perfomance Evaluation
Controls should be developed and put in place before beginning business and operational activities. These
controls are also applied throughout the process. They are categorized into feedback controls, concurrent
controls, and feedforward controls.

The Budget Committee

A budget committee is a group of people within an organization that creates and maintains fiscal
responsibility for that entity. In a company, this committee usually consists of top management along with
the chief financial officer (CFO).
The budget committee produces and updates an organization's budget manual, providing clear rules and
guidelines for the budgeting process. The budget committee is also known in practice as the management
committee or executive committee.
A budget committee is an official group that creates and oversees the standards and best practices to
implement and update an organization's spending and resource allocation plans while maintaining fiscal
responsibility. Budget committees play a key role in the success or demise of a company or other entity
that relies on generating and spending cash flows in order to remain operational. This committee is
charged with keeping organizational budgets on track, which then ensure smooth operation and financial
solvency and to stave off any financial problems before they get out of hand. In addition, the budget
committee writes and edits the company budget manual and makes sure the departments are adhering to
their submitted yearly budgets. The budget committee has a unique perspective in that they are privy to all
of the financial comings and goings of an organization. They see the whole picture, whereas people in
individual departments will only see their particular segment of the company.
The Master Budgets
A budget is a quantitative plan prepared for a specific time period. It is normally expressed in financial
terms and prepared for one year.
The budgetary process is dependent on the organizational structure and purposes. As such, the budget
normally stay in answering the basic question, “Is there a market for the business?”.
This question directs the master budgeting process to start in the sales budget.
The normal budgetary sequence
The budgeting process for a business typically starts with the sales budget, driven by the demand for its
products or services. This sales forecast then informs the creation of other budgets, including production,
operating expenses, and profit or loss projections. These "operating budgets" are followed by "financial
budgets," which focus on the company's financial health through statements of financial position and cash
flows. The culmination of all these individual budgets forms the master budget, providing a
comprehensive financial plan for the business at a specific level of activity for a given period.
Types of Budget
The types of budgets or the major composition of the master budget are:
1. The Operating budget
2. The Financial Budget

3. The Capital Budget

The following is a simplified sub classification of the above-mentioned types of budget for a
manufacturing firm:
A. Operating Budget
1. Budgeted Income Statement
a. Sales Budget
b. Production Budget
1. Material cost budget
2. Direct labor cost budget
3. Factory overhead budget
4. Inventory levels
2. Cost of Sales Budget
3. Selling and Administrative expenses budget
4. Financial Expense budget
B. Financial Budget
1. Budgeted Statement of Financial Position
2. Cash Budget
C. Capital Investment Budget
Budgeting Terminologies Defined
Budgeted Income Statement

- is a financial statement that companies use to estimate their future bottom lines. The statement
takes into account a company's revenues and expenses, as well as its projected sales and costs.
Cash budget

- an estimation of the cash flows of a business over a specific period of time. This could be for a
weekly, monthly, quarterly, or annual budget. This budget is used to assess whether the entity has
sufficient cash to continue operating over the given time frame.]
Financial Budget

- a microeconomic concept that organizations use to estimate their revenue and expenses. Budgets
usually track these metrics over a specified time to determine the organization's financial
performance. If a budget is in surplus, it predicts the organization to profit.
Fixed budget

- A financial plan that remains the same, regardless of activity or output levels. Fixed budgets are
based on past data and management's expectations for the future.
Flexible(variable) budget

- a financial plan that varies based on activity level or production units.

Participative Budget

- a budgeting method that allows people in the lower levels of management to participate in the
budget creation process.
Physical budget

- budget that is expresses in units of materials, number of employees or number of man-hour or

service units rather than in pesos.
Planning budget

- another term for master budget.

Production budget

- quantifiable plan that sets out how many units of products a company needs to produce in order to
meet its sales goals.
Program budget

- production plan of resources needed to meet the current sales demand and ensure adequate
inventory levels.
Operating budget

- is a document that contains all expenditure and revenue that a company expects to generate from
its daily operations during a specific period of time.
Responsibility budget

- budget for a responsibility center.

Rolling (continuous, progressive) budget

- a financial planning approach where the budget or forecast is regularly updated by adding a new
budget period as the current one expires.
Sales budget

- itemised documents that estimate expected sales and the revenue your company will make over a
specific sales period.

Traditional budgeting

- a financial planning document that you can use to express financial goals in quantifiable terms.
It's based on the income and costs of the previous year.
Zero-based budgeting

- a budgeting technique in which all expenses must be justified for a new period or year starting
from zero, versus starting with the previous budget and adjusting it as needed.
The Sales Budget
A sales budget is a financial plan that estimates a company’s total revenue in a specific time period. It
focuses on two things: the number of products sold and the price at which they are sold to predict how the
company will perform.
Mathematically, sales depend on both the price per unit and the quantity sold. The unit price itself is
influenced by various factors, including production costs, competition, substitute products, market trends,
regulatory requirements, demand and supply dynamics, and target profit margins, among others.
Meanwhile, the quantity of units sold is directly impacted by the unit price.
Additional factors that shape a sales forecast include historical sales data, overall economic and industry
conditions, the connection between sales and economic indicators (such as GDP, GNP, personal income,
employment rates, and industrial production prices), product profitability comparisons, findings from
market research, advertising and promotional activities, sales team quality, seasonal trends, production
capacity, and long-term sales trends across different product lines. In creating forecasts, factors that show
a strong correlation with sales patterns are identified and applied.
Basically, there are three ways of making escalates for the sales budget:
a. statistical forecasting based on analysis of general business conditions, market
conditions, product growth curves, etc.
b. Make an internal estimate by collecting the opinions of executives and sales staff.
c. Analyze the various factors that affect sales revenue and then predict the future behavior of each of
these factors.

The projected number of units sold can be estimated across various categories, such as product line,
department, geographic region, model, and market classification. To predict the number of units to be
sold, a range of forecasting methods is utilized, often incorporating probability concepts, best-estimate
models, statistical analysis, and simulation techniques.

Sample Problem 3.1. Estimated Sales in Units and Pesos

The management of New corporation is considering three state economic conditions: strong, fair, and
weak. Based on some macro studies, it has been agreed that the economy in the coming year may be 50%
strong, 60% fair and 10% weak. The projected number of units are 140,000 units, 70,000 units, and
40,000 units for strong, fair, and weak economic conditions, respectively. The budgeted unit sales price
given the estimates in units sold is P 150. Two
percent (2%) of the gross sales are estimated to be uncollectible.

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

Solutions/ Discussions:

1. The budgeted sales in units shall be determined as follows:

Economy Projected Sales Units Probability Budgeted Units Sales

 A 140,000 50% 70,000
B 70,000 60% 46,200
C 40,000 10% 4,000

Total 120,200

2. The budgeted net sales in pesos shall be:

Budgeted sales in units 120,200
x Unit sales price P 150
Budgeted gross sales in pesos 18,030,000
Less: Allowance for doubtful accounts
(P 18,030,000 x 2%) 360,600
Budgeted net sales in pesos P 17,669,400

Once the sales units are projected and the sales amount already budgeted, the budgeted costs and
expenses would now be estimated, then the financial budgets all in connection with the strategic plan of
the business.

The Production Budget

Budgeted production relies on projected sales and established inventory policies. Typically, an inventory
policy is based on the anticipated number of units to be sold in the upcoming period. The formula for
budgeted production can be derived using the traditional approach to determine the number of units sold,
where beginning finished goods inventory plus production, minus ending finished goods inventory, equals
budgeted sales. You tweak the formula and the computation for
the budgeted production is as follows:

Table 3.1. Pro-Forma 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

Once the budgeted production is set, the budgeted materials, direct labor, and variable overhead may now
be prepared. The budgeted fixed overhead is based on normal capacity (e.g., normal production) which is
considered flat or constant over the periods (e.g., months) covered by the budget. It differs from the
master budget where its level of capacity varies from one month to another.

The Direct Materials Budget

The raw materials budget is based on budgeted production. There are two (2) materials budgets
to be estimated;
1. Budgeted direct materials used
2. Budgeted direct materials purchases

Budgeted direct materials used budget

Multiply the budgeted production by the standard materials per unit of finished goods and you get the
budgeted direct materials to be used, or the budgeted direct materials requirements. This makes the
standard costing system a “sine qua non” in the budgetary process. The standard cost is used in the
preparation of the direct materials budgets, direct labor, variable overhead, fixed overhead, selling
expenses, and administrative expenses budgets as well.

Budgeted direct materials purchases budget

The direct material budget for the period is calculated as the beginning materials on hand plus the costs to
purchase additional inventory minus ending inventory. Its focus surrounds the cost associated with the
direct materials utilized in the product for the respective period.
This procedure is derived from the traditional computation of raw materials used which is raw materials
inventory-beginning plus materials purchases less raw materials inventory-ending.

Table 3.2. Pro-Forma Budgeted Direct Materials Used and Purchases

Budgeted direct materials 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 direct mat. Purchases in units x
x Materials cost per unit x
Budgeted materials purchases in pesos Px
The Direct Labor Budget
In a labor-intensive operation where employees are paid hourly, the budgeted direct labor hours are
calculated by multiplying the budgeted production by the standard direct labor hours required per unit. To
determine the budgeted direct labor cost, the budgeted direct labor hours are then multiplied by the
standard hourly labor rate.
The standard labor hours per unit and the standard rate per hour are outlined on the standard cost sheet.
The pro-forma computation of the budgeted direct labor cost is as follows:

Table 3.3. Pro-Forma Budgeted Direct Labor

Budgeted Direct Labor hours x (Budgeted production x Std. DLH per unit)
x DL Rate per hour Px
Budgeted DL cost Px

The budgeted direct labor hours would determine the number of production personnel needed to be
employed for a given budgetary period.
The Factory Overhead Budget

Factory overhead should be budgeted separately for its fixed and variable components. Fixed overhead
remains constant in total, with the standard fixed overhead rate calculated based on normal capacity. For
short-term budgeting, this standard fixed overhead rate is treated as a constant.

Total variable overhead costs fluctuate with production levels, though the variable cost per unit remains
constant.

The computational guideline for the factory overhead is as follows:

Table 3.4. Budgeted Factory Overhead Computations

Budgeted variable overhead x (Budgeted production x Std. Var OH per unit)
Budgeted fixed overhead P x (Normal capacity x Std. Fx OH rate/ unit)
Budgeted total overhead Px

The standard hours per unit and standard overhead rates per hour are to be based on the standard cost
sheet developed by the business.

The Budgeted Statement of Cash Flows

A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial
health and operational efficiency.

The cash flow statement paints a picture as to how a company’s operations are running, where its money
comes from, and how money is being spent. Also known as the statement of cash flows, the CFS helps its
creditors determine how much cash is available (referred to as liquidity) for the company to fund its
operating expenses and pay down its debts. The CFS is equally important to investors because it tells
them whether a company is on solid financial ground. As such, they can use the statement to make better,
more informed decisions about their investments.

Several models of cash management, presentation and analyses have been developed for management
use, as follows:

1. Cash budget model

2. Economic cash flow model
3. Accounting statement of cash flow model

The presentation formats of these cash report presentation models are presented in each of the boxes in
the following page.

Fig. 6.2 Cash Report Presentation Models

The main components of the Cash Flow Statement are cash from three areas: Operating activities,
investing activities, and financing activities. This classification mat be traced from understanding the
general contents of the Statement of Financial Position and Statement of Profit and Loss.

Statement of Profit and Loss

The operating activities on the CFS include any sources and uses of cash from business activities. In other
words, it reflects how much cash is generated from a company’s products or services. It employs as the
current assets and current liabilities. The difference of current assets and current liabilities is called the
working capital. It is the fundamental resource used by the management in managing revenues, costs, and
profit. As such, current items pertain to operating activities and are excluded from financing and investing
activities.
Investing activities include any sources and uses of cash from a company’s investments.
Financing activities includes the sources of cash from investors and banks, as well as the way cash is paid
to shareholders. This includes any dividends, payments for stock repurchases, and repayment of debt
principal (loans) that are made by the company.
Under the International Financial Reporting Standards (IFRS), specifically International Accounting
Standard, interest expense can be classified as either operating or investing activities based on the purpose
for which it was incurred. If the interest expense is incurred to support the business's operating activities,
it is classified as an operating item.
Dividend income may be classified as either operating or investing activity depending on the nature of the
investment from which the dividend is derived and the purpose of dividend distribution.

Schedule of Accounts Receivable Collections

Credit sales are collected over a period of time. Collection patterns are to be established to more
accurately estimate the inflows of cash from operations. Total collections from receivables include those
from credit customers and cash sales.
At its most basic, a schedule of accounts receivable is a simple list of all customers who owe a business
money. Most often, businesses maintain a schedule of accounts receivable if they have customers who
frequently pay only in part when purchasing from their business. For example, a company that offers a
store credit card to customers may use an accounts receivable schedule to track outstanding balances.
Schedule of Accounts Payable Payments
Credit purchases are not usually paid in the period of purchase. Normally, payments are spread over a
number of months. A schedule of account payables payments is to be made to more accurately determine
timing of cash outflows to merchandise suppliers.
While an accounts receivable schedule focuses on customer payments, an accounts payable schedule
works for companies that acquire their materials, manufactured goods or other services from another
company. Similarly, if you sell materials to another business, you may keep a record of their outstanding
balance with your company by creating an accounts payable schedule. This helps you or other businesses
track the balances of those they work with so they receive their payments on time.
Accruals and Prepayments
There are also accrued and prepaid (deferred or unearned) income and expenses. In the budgeted
statement of cash flows, only the cash portion of the accrued and prepaid items are considered.
Let us revisit the contents of the accrued and prepaid expenses accounts to determine the amount of
expenses paid, as shown below:

Accrued Expenses Prepaid Expenses

- + + -

PAID Beg. Bal Beg. Bal x INCURRED

x x x

End. Bal INCURRED PAID x Beg. Bal x

x x

Using the T-account analysis, the “expenses-paid” would be computed as:

Operating expenses incurred P x
Add: Accrued expenses, beg. Px
Prepaid expenses, end x x
Total
Less: Accrued expenses, end x
Prepaid expenses, beg. x x
Operating expenses paid Px

In determining the amount of income received, let us also revisit the contents of accrued and deferred
income accounts, as shown below.
Accrued Income Deferred Income

+ - - +

Beg. Bal RECEIVED EARNED x Beg. Bal x

 x x

EARNED End Bal. x End Bal. x RECEIVED x

x

Using the T-account analysis, the “income received” is computed as follows:

Income earned P x
Add: Accrued income, beg. Px
Deferred income, end x x
Total
Less: Accrued income, end x
Deferred income, beg. x x
Income received Px

Operating Expenses
Operating expenses budgets should be detailed in alignment with accrual accounting principles. Separate
budget schedules should be created for marketing, selling, and administrative expenses. For added value,
classify expenses based on whether they directly relate to specific segments and whether they are
controllable or uncontrollable by the segment manager.
Operating expenses may also be categorized by new model of business functions: research and
development, design engineering, marketing, distribution, and customer service expenses. Production
costs are grouped and reported under the cost of goods manufactured and sold.
Research and Development
Leading companies, especially those in tech-based business environment, must allocate resources to
research and development (R&D) to maintain competitiveness. A detailed R&D budget is essential for
managers making strategic and operational decisions.
R&D typically involves three phases: basic research, applied research, and development. These phases
focus on cost reduction, product enhancement, and the creation of new products. The budget distribution
for each phase should be clearly projected and summarized.
Budgeting Models
Organizations use various budgeting models, including flexible budgeting, fixed (or static) budgeting,
continuous budgeting, zero-based budgeting, life-cycle budgeting, activity-based budgeting, kaizen
budgeting, and government budgeting.
Flexible budgeting distinguishes between variable and fixed costs, allowing budget cost at varying
business activity levels. It uses standard costs to prepare budgets at different production levels. While
total fixed costs remain unchanged, total variable costs rise with increased production. Budgeted costs
based on actual production levels serve as standard costs, which are then compared with actual costs for
cost variance analysis.
 An illustration of flexible budgets follows:
Sample Problem 3.2. Flexible Budgeting
The Mindanao Enterprises has a unit direct materials cost of P 11, unit direct labor cost of P 6, unit
variable overhead cost of P 3, factory rent paid of P 250,000, factory depreciation of P 450,000, and
miscellaneous fixed overhead of P 120,000. The company's normal capacity, which is also its maximum
capacity, is 22,000 units. The budgeted costs at 75%, 85%, 95%, and 100% capacity are as follows:
Capacity utilization rate 75% 85% 95% 100%
Levels of capacity in units 16,500 18,700 20,900 22,000

Variable Costs: Rate/unit

Direct materials P 11 P 181,500 P 205,700 P 229,900 242,000

Direct labor 6 99,000 112,200 125,400 132,000

Variable overhead 3 49,500 56,100 62,700 66,000

Subtotal P 20 330,000 374,000 418,000 440,000

Fixed costs

Rent P 250,000 P 250,000 P 250,000 P 250,000 P 250,000

Depreciation 450,000 450,000 450,000 450,000 450,000

Miscellaneous 120,000 120,000 120,000 120,000 120,000

Sub-total 820,000 820,000 820,000 820,000 820,000

Budgeted Production Costs P 1,150,000 P 1,194,000 P 1,238,000 P 1,260,000

Note:
The costs rates are defined in their constant expression. Variable cost is constant
per unit while fixed cost is constant per total.
 Total variable cost changes in relation with the change in capacity levels while total
fixed costs remain unchanged.
 The cost rates are defined in their constant expression. Variable cost is constant per unit while fixed cost is
constant per total.
 Total variable cost changes in relation with the change in capacity levels while total fixed costs remain
unchanged.

Fixed or static budgeting does not segregate cost into fixed and variable components. Costs are
estimated only at a single level of activity. Actual costs are compared with the budgeted costs regardless
of the actual level of production, and cost variances are obtained and analyzed accordingly.
Continuous or rolling budgeting maintains a particular time frame (e.g., 12 months) covered in
budgeting. When a time segment, such as a month, has passed, it is dropped from the budget frame and a
new month is added to maintain the same period of time covered by the budget.
Zero-based budgeting (ZBB) does not consider past performance when forecasting future needs.
Budgeted costs are classified and packaged by activities that must be prioritized and justified in terms of
their necessity. ZBB encourages an objective review of all costs to better control spending. It starts from
the lowest budgetary units, determining objectives, operations, and costs for each activity and alternative
means of performing it. Each activity is evaluated with multiple levels of service and ranked according to
its importance. A decision package is created that details various service levels, including at least one
level lower than the current one. Each expenditure is justified for each budget period, and costs are
reviewed from a cost-benefit perspective.
Life-cycle budgeting aims to account for all costs across the "value chain" stages, including research and
development, design, production, marketing, distribution, and customer services. This model is crucial for
pricing, as product revenue should cover the full scope of business costs incurred. It is aligned with the
product life-cycle stages: infancy, growth, expansion, and maturity. Around 80% of costs are often
committed before production starts, emphasizing the importance of designing in cost savings. Whole-life
costs include life-cycle costs plus “after-purchase costs”, such as operating, repair, and disposal expenses
incurred by customers. Life-cycle budgeting is related to target costing, where a target price is set in the
market, and costs and profit margins are adjusted accordingly.
Activity-based budgeting is used with an activity-based management system, breaking processes into
activities to identify value-adding tasks and their cost drivers. Activities are grouped, and costs are
tracked based on drivers like setup times, machine hours, or units produced.
Kaizen (continuous improvement) budgeting assumes ongoing small innovations in products or
processes rather than the major changes. Budgets are achieved through minor improvements rather than
large changes and are based on the learning curve theory, where costs decrease with experience. Kaizen is
closely linked to life-cycle costing.
Governmental budgeting is both a financial plan and an expression of public policy, holding the force of
law. It serves as a control mechanism for government expenditures. A government budget is a legal
document, a law enacted by the congress, which must be complied with by heads and personnel of
various government agencies. Since government budgeting is not profit-centered, the use of budgets in
the appropriation process is of major importance. One governmental budgeting concept is "line
budgeting," where each line expense must align with approved appropriations.

Sample Problem 3.4. Projected Sales and Estimated Collections from Customers
Delmar Industries made the following projections on its sales for the upcoming year, 2025:

Projected units Sold

Economy Q1 Q2 Q3 Q4 Probability

Good 78,000 95,000 85,000 110,000 50%

Fair 55,000 82,000 75,000 92,000 25%

 Bad 42, 000 52,000 48,000 65,000 25%

The unit sales price is expected to remain constant at P 25. All sales are made on credit.
Receivables from customers are collected as follows: 70% in the quarter of sales, 20% in the quarter
following the sale, and 8% in the second quarter following the sale. The remaining 2% is considered
uncollectible. The accounts receivable balance on December 31, 2024, is estimated to be P 720,000, with
20% of this amount coming from third-quarter sales of 2024.
Required:
1. Schedule 1. Projected sales in units and in pesos per quarter and for the year 2025.
2. Schedule 2. Estimated collections from customers per quarter and for the year 2025.
Solutions/Discussions:
 The projected sales in units are computed by considering the probability of occurrence.
Expected units sold

Q1 Q2 Q3 Q4

Good (projected sales x 50%) 39,000 47,500 42,000 55,000

Fair (projected sales x 25%) 13,750 20,500 18,750 23,000

Bad (projected sales x 25%) 10,500 13,000 12,000 16,250

Expected Sales in Units 63,250 81,000 72,750 94,250

For example: Q1 (78,000 units x 50%) 39,000 units

(55,000 units x 25%) 13,750 units
(42,000 units x 25%) 10,500 units
Expected sales in units 63,250 units
Schedule 1. Budgeted Sales

Q1 Q2 Q3 Q4 Total

Budgeted sales in units 63,250 81,00 72750 94,250 311,250

Multiply Unit sales price P 25 P 25 P 25 P 25 P 25

Budgeted sales in pesos P 1,581,250 P 2,025,000 P 1,818,750 P 2,356,250 P 7,781,250

Schedule 2. Budgeted Collections from Customers

From sales of Credit sales Q1 Q2 Q3 Q4 Total

Q3, 2024 P 1,440,000 115,200 115,200

Q4, 2024 1,920,000 384,000 153,600 537,600

Q1, 2025 1,581,250 1,106,875 316,250 126,500 1,549,625

Q2, 2025 2,025,000 1,417,500 405,000 162,000 1,984,500

Q3, 2025 1,818,750 1,273,125 363,750 1,636,875

Q4, 2025 2,356,250 1,649,375 1,649,375

Budgeted collections from 1,606,075 1,887,350 1,804,625 2,175,125 7,473,175

customers

Solutions:
 Receivables from customers are collected as follows: 70% in the quarter of sales, 20% in the quarter following
the sale, and 8% in the second quarter following the sale.
 The credit sales in the third quarter of year 2019 were P 1,440,000 (i.e., P 720,000 x 20% / 10%). Ninety
percent (90%) of this sales has been collected at the end of 2024. Hence, to get the total sales from the third
quarter of 2024, we have to divide the remaining receivable from this quarter by 10%, which is the remaining
receivable balance.
 The credit sales in the fourth quarter of 2024 were P 1,920,000 (i.e., P 720,000 x 80% / 30%). Sixty percent
(70%) of this sales has been collected by the end of 2024. As such, to get the total sales, we have to divide the
remaining receivable from this quarter by 30%, which is the remaining receivable balance.

Sample Problem 3.4. Budgeted Production, Materials Purchases, and Payments to Suppliers
Delmar Industries has the budgeted unit sales of its product in 2024 up to the first quarter of 2025 as
follows:
2024 1st quarter 63,250
2nd quarter 81,000
3rd quarter 72,750
4th quarter 94,250
2025 1st quarter 80,000
 The company has a policy of maintaining finished goods inventory equal to 20% of the next quarter’s
sales and materials inventory of 35% of current quarter’s requirements. It takes 4 lbs. of material BX-45
to produce one unit of the product. The materials inventory at the start of the year was recorded at 80,000
pounds.
Material BX-45 costs P 1.50 per pound to purchase. The terms of the purchase are 2/30, n/40. The
company pays 60% of its purchases in the quarter of purchase and avails of the 2% trade discount. The
remaining balance is paid in the following quarter. The accounts payables at December 31, 2024, are
valued at P 90,000.
Required: For the year 2025:
Schedule 3: Budgeted production per quarter and in total.
Schedule 4: Budgeted materials purchases per quarter and in total.
Schedule 5: Budgeted payments to merchandise suppliers.

Solutions/ Discussions:
Schedule 3. Budgeted Production

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted sales in units 63,250 81,000 72,750 94,250 311,250

Add: Finished goods - 16,200 14,550 18,850 16,000 16,000

end

Total needs 79,450 95,550 91,600 110,250 327,250

Less: Finished goods - 12,650 16,200 14,550 18,850 12,650
beg

Budgeted sales in pesos 66,800 79,350 77,050 91,400 314,600

Solutions:
 Finished goods-end = 20% x next quarter’s sales

Q1 = 81,000 units x 20% = 16,200 units

Q2 = 72,750 units x 20% = 14,550 units
Q3 = 94,250 units x 20% = 18,850 units
Q4 = 80,000 units x 20% = 16,000 units

 Finished goods - beg = the ending of the previous quarter

Q1 = 63,250 units x 20% = 12,650 units

  The ending inventory of the fourth quarter is the ending inventory of the year and the beginning inventory of the
first quarter is the beginning of the year.

Schedule 4. Budgeted Materials Purchases

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Budgeted production 66,800 79,350 77,050 91,400 314,600
Multiply: Standard materials 4 lbs 4 lbs 4 lbs 4 lbs 4 lbs
per unit

Budgeted materials usages (in 267,200 317,400 308,200 365,600 1,258,000

lbs)
Add: Materials inventory, end 93,520 111,090 107,870 127,960 127,960

Total materials needs 360,720 428,490 416,070 493,560 1,385,960

Less: Materials inventory - 80,000 93,520 111,090 107,870 127,960
beg

Budgeted materials purchases 280,720 334,970 304,980 385,690 1,306,360

(in lbs)
Multiply: Materials cost per P 1.50 P 1.50 P 1.50 P 1.50 P 1.50
lbs

Budgeted materials purchases P 421,080 P 502,455 P 457,470 P 578,535 P 1, 959,540

(in pesos)

Solutions:
 Materials inventory end = 35% x Current quarter’s needs

Q1 = 267,200 units x 35% = 93,520 lbs.

Q2 = 317,400 units x 35% = 111,090 lbs.
Q3 = 308,200 units x 35% = 107,870 lbs.
Q4 = 365,600 units x 35% = 127,960 lbs.

 1st Quarter of 2025= 80,000

 Schedule 5. Budgeted Payments to Merchandise Suppliers

To purchases Credit Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

of purchases

Q4, 2024 P 225,000 P 90,000 P 90,000

Q1, 2025 421,080 247,595 168,432 416,027

Q2, 2025 502,455 295,444 200,982 496,426

Q3, 2025 457,470 268,992 182,988 451,980

Q4, 2025 578,535 340,178 340,178

Budgeted payment to P 337,595 P 463,876 P 469,974 P 523,166 P 1,794,611

merchandise supplier

Solutions:
 The payment pattern is 60% - 40%. Payments to merchandise suppliers are made in 2 quarters; sixty percent are
paid in the quarter of purchase and forty percent are paid in the following quarter after purchase.

 The accounts payables at December 31, 2024, are valued at P 90,000.

 The credit purchases in the fourth quarter of 2024 were P 225,000 (i.e., P 90,000 / 40%). The 60% have been
paid in the quarter the purchases were made.

 The payment made to suppliers in the quarter of purchase accounting for 60% of all purchases is subject to 2%
trade discount.

Example, payment made in Q1 of 2025 for purchases made in Q1 of 2025 is P 112,931 (i.e., P 421,080 x 60% x
98%). The payment made in the following quarter accounting for the remaining 40% of the purchases is not
subject to 2% trade discount.

Q1, 2025
Q1 (P 421,080 x 60% x 98%) = 247,595
Q2 (P 421,080 x 40%) = 168,432

Q2, 2025
Q2 (P 502,455 x 60% x 98%) = 295,444
Q3 (P 502,455 x 40%) = 200,982

Q3, 2025
Q3 (P 457,470 x 60% x 98%) = 268,992
Q4 (P 457,470 x 40%) = 182,988

Q4, 2025
 Q4 (P 578,535 x 60% x 98%) = 340,178

Sample Problem 3.5 Budgeted Direct Labor and Factory Overhead

RCK Corporation pays its production personnel at a rate of P 25 per direct labor hour. It takes 0.30
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 4 per direct labor hour and the standard fixed overhead
rate is P 2 per direct labor hour.
The company’s normal capacity is 60,000 units or 18,000 direct labor hours. Forty percent (40%) of the
total fixed overhead is non-cash. Overhead costs are paid 50% 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 2024 are P 95,000 variable and P 60,000 fixed.
The budgeted production in units for 2025 are estimated at: Q1, 60,000 units, Q2, 78,000 units; Q3,
80,000 units, and Q4, 93,000 units.

Schedule 6: Budgeted Labor Cost

Q1 Q2 Q3 Q4 Total
Budgeted Production 60,000 78,000 80,000 93,000 311,000

Multiply: Standard Direct Labor Hours 0.3 0.3 0.3 0.3 0.3
per unit
Budgeted Direct Labor Hours 18,000 23,400 24,000 27,900 93,300
Multiply: Direct Labor rate per hour 25 25 25 25 25
Budgeted Direct Labor Cost P450,000 P585,000 P600,000 P697,500 P2,332,500

Schedule 7: Budgeted Factory Overhead

Q1 Q2 Q3 Q4 Total
Direct Labor per hour 18,000 23,400 24,000 27,900 93,300

Multiply: Variable Overhead rate per DLH 4 4 4 4 4

Variable Factory Overhead 72,000 93,600 96,000 111,600 144,000

Add: Fixed Factory Overhead 36,000 36,000 36,000 36,000 36,000
Budgeted Factory Overhead P108,000 P129,600 P132,000 P147,600 P409,200

Fixed Factory Overhead = Normal Capacity x Fixed Overhead rate per DLH
Fixed Factory Overhead = 18,000 x P2
 Fixed Factory Overhead = P36,000

Schedule 8: Budgeted cash payments for labor and overhead

Q1 Q2 Q3 Q4 Total
Direct Labor Cost 450,000 585,000 600,000 697,500 2,332,500

Factory Overhead Cost 108,000 129,600 132,000 147,600 409,200

Budgeted Payments to Conversion Cost P558,000 P714,600 P732,000 P845,100 P2,741,700

Notes to remember from the problem:

 Overhead costs are paid 50% 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 2024 are P 95,000 variable and P 60,000
fixed.
 The standard variable overhead rate is P 4 per direct labor hour and the standard fixed overhead
rate is P 2 per direct labor hour.
 Forty percent (40%) of the total fixed overhead is non-cash.

Payments of Factory Overhead

Amount Q1 Q2 Q3 Q4 Total
Variable Overhead

Q4 2024 95,000 47,500 47,500

Q1 2025 72,000 36,000 36,000 72,000

Q2 2025 93,600 46,800 46,800 93,600

Q3 2025 96,000 48,000 48,000 96,000

Q4 2025 111,600 55,800 55,800

Budgeted payments to variable overhead P83,500 P84,500 P94,800 P103,800 P364,900

Solutions:
Amount:
Q1 2025: 18,000 x 4 = 72,000
Q2 2025: 23,400 x 4 = 93,600
Q3 2025: 24,000 x 4 = 96,000
 Q4 2025: 27,900 x 4 = 111,600

Q1 Payments:
95,000 x 50% = 47,500
72,000 x 50% = 36,000

Q2 payments:
72,000 x 50% = 36,000
93,600 x 50% = 46,800

Q3 payments:
93,600 x 50% = 46,800
96,000 x 50% = 48,000

Q4 payments:
96,000 x 50% = 48,000
111,600 x 50% = 55,800
Payments of Factory Overhead
Amount Q1 Q2 Q3 Q4 Total
Cash Fixed Overhead

Q4 2024 (60,000 x 60%) 36,000 18,000 18,000

Q1 2025 (36,000 x 60%) 21,600 10,800 10,800 21,600

Q2 2025 (36,000 x 60%) 21,600 10,800 10,800 21,600

Q3 2025 (36,000 x 60%) 21,600 10,800 10,800 21,600

Q4 2025 (36,000 x 60%) 21,600 10,800 10,800

Budgeted payments to fixed overhead P28,800 P21,600 P21,600 P21,600 P93,600

Total payments to overhead P112,300 P106,100 P116,400 P125,400 P460,200

Sample Problem 3.6 Budgeted Statement of Profit or Loss

The standard costs of RCK Corporation are summarized below:
 Unit Rate Cost per unit
Direct Material 2 kg P1.5 per kg P3.00
Direct Labor 0.30 hours 20 per hour 6.00
Variable Factory 0.30 hours 4 per hour 1.20
Overhead
Fixed Factory 0.30 hours 2 per hour 0.60
Overhead
Total P10.80

The standard costs are the same from year 2024 to 2025. The work-in-process inventories are estimated at
15% of the current production put into the process. The work-in-process on December 31, 2024 is
determined at P80,000. Operating expenses are budgeted at 25% of sales in a quarter. Non-cash operating
expenses including accruals and prepayments are estimated at 10% of sales. Other income from
operations is projected at 12% of sales. The actual of 2024 and the estimated accrued and prepaid items in
2025 are as follows:
Q4 2024 Q1 Q2 Q3 Q4
Accrued Expenses P15,000 P12,000 P12,000 P17,600 P16,500
Prepaid Expenses 25,000 20,000 22,000 22,000 22,000
Accrued Income 13,000 10,000 11,000 12,500 13,600
Prepaid Income 6,000 9,000 9,100 9,800 10,450
Income Tax Rate 34%

Other information:
Q1 Q2 Q3 Q4
Materials Used 50,000 kg 63,000 kg 71,000 kg 84,000 kg
Direct Labor P450,000 P585,000 P600,000 P697,600
Factory Overhead 108,000 129,600 132,000 147,600
Sales 1,500,000 1,800,000 2,200,000 2,000,000

Schedule 9. Budgeted cost of goods manufactured and sold

Q1 Q2 Q3 Q4 Total
Materials Used P150,000 P189,000 P213,000 P252,000 P804,000

Direct Labor 450,000 585,000 600,000 697,600 2,332,600

Factory Overhead 108,000 129,600 132,000 147,600 517,200

Total Factory Cost 708,000 903,600 945,000 1,097,200 3,653,800

Add: WIP inventory, beg. 80,000 P94,950 121,365 125,775 422,090

Total cost put in process 788,000 998,550 1,066,365 1,222,975 4,075,890

Less: WIP inventory ending 94, 950 121,365 125,775 145,680 487,770

Cost of goods manufactured 693,050 877, 185 940,590 1,077,295 3,588,120

Add: FG inventory, beg. 162,000 129,600 129,600 190,080 611,280

Total goods available for sale 855,050 1,006,785 1,070,190 1,267,375 4,199,400

Less: FG inventory ending 129,600 129,600 190,080 178,200 627,480

Cost of goods sold P725,450 P877,185 P880,110 P1,089,175 P3,571,920

 Materials used= Materials used in units x Standard materials cost per unit
Q1 = 50,000kg x 3.00 = 150,000
Q2 = 63,000kg x 3.00 = 189,000
Q3 = 71,000kg x 3.00 = 213,000
Q4 = 84,000kg x 3.00 = 252,000
 The work in process of December 31, 2024, is the beginning work in process of 2025.
 Work in process inventory, ending = 15% x current production cost into process.
Q1= 633,000 x 15% = 94,950
Q2= 809,100 x 15% = 121,365
Q3= 838,500 x 15% = 125,775
Q4= 971,200 x 15% = 145,680
 Finished goods inventories = FG on hand x Standard unit cost (10.80)
UNITS COST
FG- beg FG- end FG- beg FG- end
Q1 15,000 12,000 162,000 129,600
Q2 12,000 12,000 129,600 129,600
Q3 12,000 17,600 129,600 190,080
Q4 17,600 16,500 190,080 178,200

Notes to remember from the problem:

 Operating Expense = 25% of sales
 Other Income = 12% of Sales
Schedule 10. Budgeted Statement of Profit or Loss
Q1 Q2 Q3 Q4 Total
Sales P1,500,000 P1,800,000 P2,200,000 P2,000,000 P7,500,000

Cost of goods sold (725,450) (877,185) (880,110) (1,089,175) (3,571,920)

Less: Operating Expenses (375,000) (450,000) (550,000) (500,000) (1,875,000)

Add: Other Income 180,000 216,000 264,000 240,000 900,000

Income before tax 579,550 688,815 1,033,890 650,825 2,953,080

Less: Income tax (34%) (197,047) (234,197) (351,523) (221,281) (1,004,048)

Profit (Loss) P382,503 P454,618 P682,367 P429,544 P1,949,032

Notes to remember for schedule 11 and 12:

 The beginning accrued expenses balance in quarter 1 (i.e., P 15,000) is the beginning of the year.
The ending prepaid expenses balance in quarter 4 is the ending balance of the year.
 Accrued expense and expense balances do not accumulate. They are continuous and are carried
from one period to another. This observation is also true regarding accrued income and deferred
income.
Schedule 11. Budgeted Cash Payments to Operating Expenses
Q1 Q2 Q3 Q4 Total
Operating expenses P375,000 P450,000 P550,000 P500,000 P1,875,000

Add: Accrued expense – beg. 15,000 12,000 12,000 17,600 56,600

Add: Prepaid expenses – end 25,000 20,000 22,000 22,000 89,000

Total 415,000 482,000 584,000 539,600 2,020,600

Less: Accrued expense – end (12,000) (12,000) (17,600) (16,500) (58,100)

Less: Prepaid expense – beg. (20,000) (22,000) (22,000) (22,000) (86,000)

Operating expenses paid P383,000 P448,000 P544,400 P501,100 P1,876,500

Schedule 12. Budgeted Cash Receipts from Other Revenue

Q1 Q2 Q3 Q4 Total
Other revenues earned P180,000 P216,000 P264,000 P240,000 P900,000

Add: Accrued income – beg. 13,000 10,000 11,000 12,500 46,500

Add: Deferred income – end 9,000 9,100 9,800 10,450 38,350

Total 202,000 235,100 284,800 262,950 984,850

Less: Accrued income – end (10,000) (11,000) (12,500) (13,600) (47,100)

Less: Deferred income – beg. (6,000) (9,000) (9,100) (9,800) (33,900)

Other revenues received P186,000 P215,100 P263,200 P239,550 P903,850

Sample Problem 3.7. Budgeted Cash Flows

Cash transactions and information are as follows:
a. non-current assets are to be acquired in the second and third quarters of 2025 in the amounts of P
400,000 and P 225,000, respectively. Some old non-current assets are to be sold at its book value for P
500,000 in the fourth quarter.
b. Dividends are to be paid in March for P 300,000 and August for P 450,000.
c. The minimum cash balance is set at P 500,000. In case of deficit, the corporation can avail a credit line
in multiples of P 50,000 from a financing institution at a rate of 11% per annum. Interest is paid quarterly
based on the outstanding balance at the beginning of the quarter. Payments to borrowings in multiples of
P50,000 are made whenever cash is available determined at the beginning of the quarter.
d. The cash balance on January 1, 2025, is expected to equal the minimum cash balance.

Schedule 13. Cash Budget

Reference Q1 Q2 Q3 Q4 Total
Cash balance P500,000 P536,219 P569,934 P759,009 2,365,162

Add: Cash receipts

Collection from customers Schedule 2 1,606,075 1,887,350 1,804,625 2,175,125 7,473,175

From other revenues Schedule 12 186,000 215,100 263,200 239,550 903,850

Sale of non-current asset 500,000

Total cash available for use 2,292,075 2,638,669 2,637,759 3,673,684 11,242,187
Less: Cash payment

Merchandise purchases Schedule 5 (337,595) (463,876) (469,974) (523,166) (1,794,611)

Direct labor Schedule 6 (450,000) (585,000) (600,000) (697,500) (2,332,500)

Factory overhead Schedule 8 (108,000) (129,600) (132,000) (147,600) (409,200)

Operating expenses Schedule 11 (383,000) (448,000) (544,400) (501,100) (1,876,500)

Acquisition of non-current assets (400,000) (225,000) (625,000)

Dividends (300,000) (450,000) (750,000)

Total cash payments (1,578,595) (2,026,476) (2,421,374) (1,869,366) (7,895,811)

Cash balance before financing 713,480 612,193 216,385 1,804,318 3,346,376
Financing Cash

Borrowings (at beginning) 100,000 100,000

Payments to borrowings (at end) (100,000) (100,000)

Interests paid (at end) (2,750) (2,750)

Net financing 100,000 (102,750) (2,750)

Cash balance - ending P813,480 P509,443 P216,385 P1,804,318 P3,343,626

Summary
 A budget is a financial plan that tracks income and expenses over a specified period, helping
individuals and companies forecast and manage their finances.
 Budgeting involves setting standards, planning, organizing resources, and controlling activities.
 A master budget encompasses all organizational budgets, guiding companies in meeting fiscal goals
through structured income and expense plans.
 The budgetary process aids in communication, motivation, and performance evaluation within a
company. By setting clear standards and goals, organizations align their budgeting with overall
objectives. Planning, which requires forecasting revenue and expenses, ensures proactive resource
allocation and risk management.
 The budget committee, often consisting of top management, oversees the organization’s budget,
ensuring financial solvency and adherence to fiscal plans
 . Different types of budgets form the master budget, including operating, financial, and capital
budgets. Operating budgets cover sales, production, and related expenses, while financial budgets
focus on cash flow and the balance sheet.
 A sales budget predicts future revenue based on factors like market conditions and historical data.
 The production budget estimates the units to produce based on projected sales, inventory levels, and
direct material needs.
 Direct labor and factory overhead budgets follow, estimating labor hours and overhead costs
associated with production.
 The cash flow statement shows cash from operating, investing, and financing activities, offering
insight into the company’s liquidity and financial health.
 Various budget types, such as fixed, flexible, participative, and zero-based, cater to different
organizational needs.
 Specialized budgets like sales, production, and cash budgets are prepared based on strategic goals
and forecasts.
Schedules:

 Accounts Receivable Schedule: This schedule tracks outstanding customer balances, helping
businesses monitor cash inflows and manage credit risk. It provides insights into collection
patterns, potential bad debts, and the need for credit policies.
 Accounts Payable Schedule: This schedule tracks outstanding supplier balances, aiding in
managing cash outflows and supplier relationships. It helps optimize payment timing to take
advantage of discounts and avoid late fees.

Accruals and Prepayments:

 Accrued Expenses: These are expenses incurred but not yet paid. They represent a liability for
the business and are recorded to accurately reflect the period in which the expense was incurred.
 Prepaid Expenses: These are expenses paid in advance. They represent an asset for the business
and are gradually recognized as expenses over the period they benefit.
 Accrued Income: This is income earned but not yet received. It represents an asset for the
business and is recorded to accurately reflect the period in which the income was earned.
 Deferred Income: This is income received in advance but not yet earned. It represents a liability
for the business and is recognized as income over the period it is earned.

Budgeting Techniques:

 Flexible Budgeting: This method adjusts budgets based on varying activity levels, allowing for
more accurate cost forecasting and variance analysis.
 Zero-Based Budgeting: This approach requires each expense to be justified from scratch,
promoting cost efficiency and eliminating unnecessary spending.
 Life-Cycle Budgeting: This technique considers all costs associated with a product's life cycle,
from development to disposal, aiding in pricing and resource allocation decisions.
 Activity-Based Budgeting: This method allocates costs based on activities and their drivers,
providing a more accurate understanding of cost behavior and enabling better decision-making.
 Kaizen Budgeting: This approach focuses on continuous improvement and cost reduction,
driving operational efficiency and competitiveness.

Activity:
Multiple-choice questions:
1. What is another term for master budget?
A) Production budget C) Planning budget
B) Program budget D) Operating budget
2. What does the operating budget contain?
A) All expenditure and revenue from daily operations
B) Only revenue from sales
C) Only expenditure for production
D) Only cash flow estimates
3. What is the purpose of a cash budget?
A) To estimate cash flows over a specific period
B) To track inventory levels
C) To calculate production costs
D) To determine sales forecasts
4. What is the budgeted direct materials purchases budget calculated from?
A) Beginning materials on hand plus costs to purchase
B) Total production costs
C) Sales forecasts
D) Operating expenses
5. What is the fundamental resource used by management in managing revenues, costs, and profit?
A) Working capital C) Production budget
B) Sales budget D) Operating budget
6. What is the primary purpose of a schedule of accounts receivable?
A) To track customer outstanding balances for cash-only sales
B) To list all suppliers that owe the business money
C) To list all customers who owe the business money
D) To detail payroll expenses for the business
7. The purpose of an accounts payable schedule is to:
A) Track outstanding balances for customer credit accounts
B) Determine cash inflows from customer sales
C) Track balances owed to suppliers for goods or services acquired
D) Manage payroll expenses
8. In budgeting, which approach starts from scratch each period, requiring each expense to be justified?
A) Flexible budgeting
B) Zero-based budgeting (ZBB)
C) Life-cycle budgeting
D) Continuous budgeting
9. What is the primary focus of life-cycle budgeting?
A) To plan costs at different production levels
 B) To track expenses only during the production phase
C) To cover all costs across each stage of a product's life cycle
D) To ensure compliance with government policies
10. Flexible budgeting primarily benefits a company by:
A) Allowing it to only track fixed costs
B) Maintaining a consistent 12-month time frame
C) Adjusting budgets according to different levels of business activity
D) Reducing the importance of activity-based management

True-or-false
1. A master budget is the central financial planning document that includes how a company will spend
and how much it expects to earn in a fiscal year.
2. The rolling budget is a financial planning approach where the budget is updated only once a year.
3. The factory overhead budget should be budgeted separately for its fixed and variable components.
4. Budgeting is only carried out by companies and not by individuals.
5. The statement of profit and loss reflects how much cash is generated from a company’s products or
services.

Problem 1
Phoenix Manufacturing has the budgeted unit sales of its product from 2025 up to the first quarter of 2026
as follows:

Year Quarter Budgeted Unit Sales

2025 1st quarter 70,000

2nd quarter 85,000

3rd quarter 77,500

4th quarter 99,500

2026 1st quarter 88,000

 The company has a policy of:

 Maintaining finished goods inventory equal to 25% of the next quarter’s sales.
 Maintaining materials inventory of 40% of the current quarter’s requirements.
  It takes 5 lbs. of material AZ-30 to produce one unit of the product. At the start of the year,
materials inventory for AZ-30 was 100,000 pounds.
 Material AZ-30 costs P 1.75 per pound to purchase. The terms of the purchase are 1/20, n/30. The
company pays 70% of its purchases in the quarter of purchase and takes advantage of the 1%
trade discount. The remaining balance is paid in the following quarter. Accounts payables at
December 31, 2025, are valued at P 95,000.

Required for the Year 2026:

Schedule 3: Budgeted production per quarter and in total.
Schedule 4: Budgeted materials purchase per quarter and in total.
Schedule 5: Budgeted payments to merchandise suppliers.

Problem 2:
RCN Corporation provided the following information for the year 2025:

Direct Labor Rate per hour P15

Variable overhead rate per direct labor hour 3

Fixed overhead rate per direct labor hour 5

 It takes 0.20 standard hours to complete a finished unit.

 The company’s normal capacity is 70,000 units
 Thirty percent (30%) of the total fixed overhead is non-cash
 Overhead costs are paid 25% 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 2024 are P 45,000 variable and P 80,000
fixed.
 The budgeted production in units for 2025 are estimated at: Q1, 55,000 units, Q2, 70,000 units;
Q3, 68,000 units, and Q4, 102,000 units.
Required:
1. Schedule 6. Budgeted Labor Cost
2. Schedule 7. Budgeted Factory Overhead
3. Schedule 8: Budgeted cash payments for labor and overhead

Problem 3:
The standard costs of RCN Corporation are summarized below:
Unit Rate Cost per unit
Direct Material 3 kg P1.5 per kg P4.50
 Direct Labor 0.20 hours 15 per hour 3.00
Variable Factory 0.20 hours 3 per hour 0.60
Overhead
Fixed Factory 0.20 hours 5 per hour 1.00
Overhead
Total P9.10

 The standard costs are the same from year 2024 to 2025.
 The work-in-process inventories are estimated at 20% of the current production put into the
process. The work-in-process on December 31, 2024, is determined at P44,000.
 Operating expenses are budgeted at 30% of sales in a quarter. Non-cash operating expenses
including accruals and prepayments are estimated at 20% of sales.
 Other income from operations is projected at 16% of sales.
 The actual of 2024 and the estimated accrued and prepaid items in 2025 are as follows:
Q4 2024 Q1 Q2 Q3 Q4
Accrued Expenses P18,000 P12,000 P12,000 P13,000 P17,500
Prepaid Expenses 25,000 20,000 18,000 24,000 28,000
Accrued Income 14,000 18,000 21,000 22,500 23,600
Prepaid Income 7,000 2,000 5,500 7,800 12,350
Income Tax Rate 34%

Other information:
Q1 Q2 Q3 Q4
Materials Used 40,000 kg 53,000 kg 61,000 kg 84,000 kg
Direct Labor P420,000 P500,000 P660,000 P691,000
Factory Overhead 100,000 139,000 142,000 187,300
Sales 1,560,000 1,900,000 2,500,000 1,921,000

Required:
1. Schedule 9. Budgeted cost of goods manufactured and sold
2. Schedule 10. Budgeted Statement of Profit or Loss
3. Schedule 11. Budgeted Cash Payments to Operating Expenses
4. Schedule 12. Budgeted Cash Receipts from Other Revenue