Short Term Budgeting Lecture 1

• Budgeting is the process of preparing budgets, plans, schedules, and forecasts and the process
requires several important skills, including forecasting, a knowledge of how activities affect costs,
and the ability to see how the organization’s different activities fit together.
• Master budget is the plan for the coming year, also known as the static budget
• The income statement part of the budget is called the profit plan
Concepts;
• Budgets should start with a top-down strategic plan that guides and integrates the whole
company and its individual budgets.
• Budgeting is a management task, not a bookkeeping task, and it requires a great deal of
planning and thoughtful input from a broad range of managers in a company
• Budgets are used throughout managers’ planning, operating, and control activities.
• Budgets are future oriented and make extensive use of estimates and forecast
• Flexible budgets are based on the actual number of units produced rather than the budgeted
units of production
• Zero-based budgets require managers to build budgets from the ground up each year
• Although the budgets are being prepared annually, changing expectations often require that
budgets be revised frequently
• The master budget is based on estimated sales and production volume and is prepared before
the budget period begins. The flexible budget is based on actual sales and production volume
and is prepared after the budget period ends
Percentage of sales forecasting method is a simple but practical procedure for forecasting
financial statement variables. The procedures are based on two assumptions (a) that all variables are tied
directly with sales (b) that the current levels of most balance sheet items are optimal for the current sales
level. Steps;
• Identify assets and liabilities that will vary spontaneously with sales
• Estimate the amount of net income that will be retained
• Compute the amount of External Financing Needed by subtracting increase in spontaneous
liabilities and income retained from increase in total financing required (increase in assets due to
increase in sales)
1. The current year sales of Matcha company amounted to 4 million. The dividend payout ratio is
20%. The percent of sales in each balance sheet item that varies directly with sales are expected
to be as follows
Current assets 30%
Net fixed assets 45%
AP and accrued exp 25%
Net profit rate 15%
Required;
a. Supposed that next year sales are expected to increase by 25%. How much additional
(external) capital will be required?
b. What would happen to capital requirements if Matcha can increase its sales by 50% and the
payout ratio is maintained
c. What would happen to additional capital requirement if the payout ratio is raised to 40% and
there was an increase in sales by 25%
2. Adriano company is developing its budgeted cost of goods sold for next year. Adriano has
developed the following range of sale estimates and their corresponding probabilities for the
year.
Sale estimates Probability
1,500,000 25%
1,800,000 45%
2,400,000 30%
Adriano company’s cost of goods sold averages 75% of sales. What is the expected cost of goods
sold?
3. Reid Co. makes payments for purchases 10% during the month of purchase, 60% in the following
month, and the remainder in the second month following the purchase. Purchases are projected
to be 130,000 in January, 140,000 in February, and 160,000 in March. The March 31 accounts
payable balance will be?
4. Bebe corporation expected to sell 150,000 video cards during the month of May, and the
company’s master budget contained the following data related to the sale and production of
these games
Revenue 2,400,000
COGS;
Direct labor 300,000
Direct materials 675,000
Variable OH 450,000
Contribution margin 975,000
Fixed OH 250,000
Fixed SAD exp 500,000
Operating income 225,000
Actual sales during May were 180,000 video cards. Using a flexible budget, the company expects
the operating income for the month of May to be?
5. Each unit of product ZIM takes 5 direct labor hours to make. Quality standards are high and 8% of
the units produced are normally rejected due to substandard quality. Next month’s budgets are
as follows:
Beginning inventory of finished goods 3,000 units
Planned ending inventory of finished goods 7,600 units
Budgeted sales of ZIM 36,800 units
All stocks of finished goods must have successfully passed the quality control check. What is the
direct labor budget for the month?
6. Ohmaygahd plans to sell 40,000 units of finished product in July. Management (1) anticipates a
growth rate in sales of 5% per month thereafter and (2) desires a monthly ending finished goods
inventory (in units) of 80% of the following month’s estimated sales. There are 30,000 completed
units in June 30 inventory. Each unit of finished product requires three pounds of direct material
at a cost of 7.5 peso per pound. There are 160,000 pounds of direct material in inventory on June
30. The company’s policy is to keep 60% of the month’s material usage on hand at the beginning
of the month
• Prepare a monthly production budget for the quarter ended September 30
• Prepare a budget for materials purchase

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• Budgeting is the process of preparing budgets, plans, schedules, and forecasts and the process

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