Financial Planning and Analysis – The Master Budget JOR

Introduction
During our previous discussions, we have already learned that the managerial accountant aids management in the
pursuit of the organization’s goals. Now as the organization keeps moving forward, how does management keep
track if it is meeting its goals? The company usually utilizes its financial planning and analysis (FP&A) system for this.

The FP&A usually have three subsystems, namely:

1. Planning,
2. Measuring; and
3. Evaluation of the results.

Planning activities helps the organization in setting its direction, without a formalized plan there will be no definite
goals to be achieved. Managers and individuals will not be aware of their targets and responsibilities.

Control activities usually involves comparing the actual results with the established plan (i.e., the benchmark). This
is to assess if the company is attaining its goals and if there are any deviations with the initial plan, and take any
corrective actions needed.

Both planning and control activities may be achieved through a budgetary process.

Purposes of Budgeting
A budget may be defined as a quantitative plan in allocating an organization’s resources for a specified period of time.

The budget has four primary purposes:

1. Planning – Budgeting forces management to create a plan and develop an overall direction for the
organization.
2. Communication and coordination – In order for the organization to meet its objective, managers
throughout the organization must communicate in order to proceed with the established plan.
3. Improves resource information and allocation – Going back to our discussion in relevant costing, we
understood that organizations have limited resources, thus a budget helps managers in the optimal
allocation of resources.
4. Evaluation of performance – A budget is both a planning and a control function. As a control function,
management is able to benchmark whether the company is in line with the established plan, and do they
need to perform any corrective action.

The budget period can be any length to suit the needs of the management.

Types of Planning
1. Strategic planning – is concerned with preparing the long-term action plans to attain the organizational
goals.
2. Budgetary planning – budgetary planning is concerned with the preparing the short-to medium-term plans
of the organization. An example would be the annual budget, which would be an interim step to achieve
the long-term goals of the company.
3. Operational planning – this refers to the day-to-day planning process. It is usually concerned with the
planning on how resources will be utilized to meet demand for the period.
Financial Planning and Analysis – The Master Budget JOR

Types of Budgets
There are several types of budgets with different purposes, some examples are the following:
1. Master budget – comprehensive budget covering all of the company’s operations. Master budgets are
divided into the following:
a. Operating budget – are budgets concerned with the income-generating activities of the firm:
sales, production and inventories.
b. Financial budgets – are concerned with the cash inflows and outflows.
2. Capital budget – pertains to capital investment, i.e., acquisition of long-term assets.
3. Financing budget – this is a budget on how the organization will be structured or finance, either through
debt or equity issuances.
4. Rolling budgets/Continuous/Revolving – are budgets that are continuously updated by adding a new time
period.
5. Zero-based budgeting – these are budgets that are started from scratch as if there was no previous
experience.

The Preparation of Budgets

Budget preparation may differ from organization to organization. But the core concept in the budgetary planning
and control remain the same.

Formation of the budget committee

During the planning process communication and coordination is paramount since there is an interrelationship
between operational budgets (e.g., sales, production and inventories). There is a need to reference with each
other. There should be a representative from each department.

Participative budgeting
The budgeting process involves people from the lower levels of management to participate in the budgetary
process. This is often called the bottom-up process. The advantages are as follows:
a. Empowerment
b. Motivation
c. Improved quality of forecasts

The main disadvantage of participative budgeting is it might get more complex and might take up more time.

The budget manual

The budget manual is a collection of information and documents that contains key information for those involved
in the planning process. Below are some examples of what the budget manual might include:
1. Explanation of the budgetary process
2. Organizational chart
3. Timetable
4. Key personnel involved in the budgetary process
5. Pro-forma budget templates

The master budget

The budget is the summary of all operational, financial budgets and other budgets that are interdependent. This
budget is usually summarized in nature and sent to senior management for approval.
Financial Planning and Analysis – The Master Budget JOR

The Master Budget

Our focus will be on two budgets, namely:
1. Operating budget
2. Financial budget

Please see below the components and relationships of the master budget

Sales Budget

*Purchasing budget
Production Budget
if merchandising

O
P
Direct Direct Labor Overhead E
Materials Budget Budget R
Budget A
T
I
O
Finished N
Goods A
Budget L

Selling and Cost of

Administrative Goods Sold
Expenses Budget
budget

Cash Receipts Budget F

I
N
A
Cash Disbursement N
Budget C
I
A
Cash Budget L

Budgeted Statement of
Income Budgeted Balance Sheet Cash Flows
Statement Budget
Financial Planning and Analysis – The Master Budget JOR

Developing the Master Budget

The first step in the budgeting process is sales forecasting. This is a critical step since the demand for a product or
service is usually what drives the production process.

Sales forecasting is a critical and very difficult to perform. There are several ways in forecasting sales, the sales
department head might ask for sales personnel for their individual sales predictions. The major factors affecting the
forecast are as follows:
1. Historical sales
2. Economic trends and outlook
3. The company’s industry trend
4. Political outlook
5. Market research
6. Competitors’ actions

The sequence of budgets are as follows:

1. Sales budget
2. Production budget
3. Direct materials budget
4. Direct labor budget
5. Overhead budget
6. Finished goods budget
7. Cost of goods sold budget
8. Selling, general and administrative budgets
9. Cash receipts budget
10. Cash disbursements budget
11. Cash budget
12. Budgeted income statement
13. Budgeted balance sheet
14. Budgeted statement of cash flows

We will focus first on operational budgets, followed by financial budgets.

Financial Planning and Analysis – The Master Budget JOR

Sales Budget
In the preparation of the master budget, the sales budget is always prepared first before the other budgets can be
constructed.

AngkaTeaMo produces and sells its own bottled milk tea. The company expects more sales during summer time.
With a slight decline during the rainy days. The selling price of the company’s product is expected to rise by 10%
beginning on the 3rd quarter. The selling price of each milk tea is P150.

The expected sales forecast for each quarter are as follows:

First Quarter Second Quarter Third Quarter Fourth Quarter
Unit Sales 100,000 150,000 80,000 120,000

How much is the expected sales for each quarter?

Sales Budget
For the Year Ending December 31, 2020
First Quarter Second Third Quarter Fourth Annual
Quarter Quarter
Unit Sales 100,000 150,000 80,000 120,000 450,000
Selling price P150 P150 P165 P165 −
Sales P15,000,000 P22,500,000 P13,200,000 P19,800,000 P70,500,000

What if the company sells two products? Wintermelon and Roasted Okinawa. The sales mix of the company is 3:1. The
selling price of Wintermelon and Roasted Okinawa is P150 and P170. The price increase is still expected starting at the 3rd
quarter.

Sales Budget
For the Year Ending December 31, 2020
First Quarter Second Third Quarter Fourth Annual
Quarter Quarter
Wintermelon
Unit Sales 75,000 (100,000 112,500 (150,000 60,000 (80,000 x 90,000 (120,000 337,500
x ¾) x ¾) ¾) x ¾)
Selling price P150 P150 P165 P165 −
Sales P11,250,000 P16,875,000 P9,900,000 P14,850,000 P52,785,000
Roasted Okinawa
Unit Sales 25,000 (100,000 37,500 (150,000 20,000 (80,000 x 30,000 (120,000 112,500
x ¼) x ¼) ¼) x ¼)
Selling price P170 P170 P187 P187 −
Sales P4,250,000 P6,375,000 P3,740,000 P5,610,000 19,975,000
Total Sales P15,500,000 P23,250,000 P13,640,000 P20,460,000 P72,850,00
Financial Planning and Analysis – The Master Budget JOR

Production Budget
After preparing the sales budget, we now know how many units are expected to be sold. Now management must
determine the number of units to be produced in order to meet the sales needs and the number of expected
ending inventories.

Sales in units + Planned ending inventory level = Total units required

Total units required – Expected beginning inventory = Units to be produced

The production budget is expressed in number of units. The cost is determined by the proceeding budgets.

Continuing our example with AngkaTeaMo (assuming there is only one product):

The company budgeted the following ending inventory for 2020 and 2019:
First Quarter Second Quarter Third Quarter Fourth Quarter
Ending Inventory 20,000 20,000 15,000 15,000

How many units should be produced during 2020?

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Unit Sales 100,000 150,000 80,000 120,000 450,000
Add: Ending
Inventory 20,000 20,000 15,000 15,000 15,000
Required Units 120,000 170,000 95,000 135,000 520,000
Less:
Beginning
Inventory (15,000) (20,000) (20,000) (15,000) (15,000)
Units to be
produced 105,000 150,000 70,000 120,000 445,000

Another illustration: AngkaTeaMo, desires an ending inventory of 10% of the sales for the next quarter.

First Quarter Second Quarter Third Quarter Fourth Quarter

Unit Sales 100,000 150,000 80,000 120,000 450,000
Add: Ending
Inventory 15,000 8,000 12,000 10,000 10,000
Required Units 115,000 158,000 92,000 130,000 495,000
Less:
Beginning
Inventory (10,000) (15,000) (8,000) (12,000) 10,000
Units to be 143,000
produced 105,000 84,000 118,000 450,000

The units produced in the 2nd illustration will be used for the proceeding budgets.
Financial Planning and Analysis – The Master Budget JOR

Direct Material Budget

There is an important link between the units to be produced and the number of material purchases. After we have
determined the number of units to be produced, we can now determine how many raw materials are needed and
the purchasing cost.

Raw materials needed for production + Planned ending inventory = Total raw materials required
Total raw material required – Expected beginning inventory of raw material = Raw materials to be purchased

Other important things to remember for direct material production is:

1. The required number of materials per unit of inventory
2. The purchasing cost of direct material

See the illustration below:

AngkaTeaMo’s bottle of milk tea requires 5 ounces of oolong tea and 20 grams of black pearl. Oolong tea costs
P12.5 per ounce while the pearls cost P1.50 per gram. An entity should prepare a direct material budget for each
material used in the production.

It is the company’s policy to maintain an ending inventory of 10% of raw materials to be used in the following
quarter.

Direct material budget for oolong tea

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Units to be
produced 105,000 143,000 84,000 118,000 450,000
Times: Req’d
oolong tea per
unit 5 ounces 5 ounces 5 ounces 5 ounces −
DM needed for
production
(ounces) 525,000 715,000 420,000 590,000 2,250,000
Add: Ending
DM inventory
(ounces) 71,500 42,000 59,000 52,500 52,500
Total DM
required
(ounces) 596,500 757,000 479,000 642,500 2,475,000
Less:
Beginning
Inventory
(ounces) (52,500) (71,500) (42,000) (59,000) (52,500)
Raw material
to be
purchased 544,000 685,500 437,000 583,500 2,250,000
Multiplied by:
Raw material
cost P12.5 P12.5 P12.5 P12.5 −
Raw material
purchases P6,800,000 P8,568,750 P5,426,500 P7,293,750 P28,089,000
Financial Planning and Analysis – The Master Budget JOR

Direct materials budget for black pearls

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Units to be
produced 105,000 143,000 84,000 118,000 450,000
Times: Req’d
black pearls
per unit 20 grams 20 grams 20 grams 20 grams −
DM needed for
production
(grams) 2,100,000 2,860,000 1,680,000 2,360,000 9,000,000
Add: Ending
DM inventory
(grams) 286,000 168,000 236,000 210,000 210,000
Total DM
required
(grams) 2,386,000 3,028,000 1,916,000 2,570,000 9,900,000
Less:
Beginning
Inventory
(grams) (210,000) (286,000) (168,000) (236,000) (210,000)
Raw material
purchases 2,176,000 2,742,000 1,748,000 2,334,000 9,000,000
Multiplied by:
Raw material
cost P1.50 P1.50 P1.50 P1.50 −
Raw material
purchases P3,264,000 P4,113,000 P2,622,000 P3,501,000 P13,500,000

The relationship between the production budget and the raw material purchases is very important especially for
manufacturing firms.

The budgeted total purchases for each quarter are as follows:

First Quarter Second Quarter Third Quarter Fourth Quarter Annual

Raw material
purchases P10,064,000 P12,681,750 P8,084,500 P10,794,750 P41,625,000
Financial Planning and Analysis – The Master Budget JOR

Direct Labor Budget

Since the planned level of production is already developed, the required number of direct labor hours and direct
labor cost can now be determined.

Continuing our illustration:

A batch of bottled milk tea usually include two steps to complete production, mixing and packaging. Laborers need
2 hours to mix the batch at P48. While, 1 hour is needed to finish packaging at P40 per hour.

A batch is composed of 50 bottles. Therefore:

1. Mixing – 2 hours / 50 bottles = 0.04 hours per bottle.
2. Packaging − 1 hour / 50 bottles = 0.02 hours per bottle.

Units to be produced x required DLH = Direct labor hours needed for production
Direct labor hours x Direct labor rate = Direct labor cost

Direct labor budget for mixing

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Planned
Production 105,000 143,000 84,000 118,000 450,000
Multiplied by:
Req’d DLH 0.04 0.04 0.04 0.04 −
Direct labor
hours needed
for production 4,200 5,720 3,360 4,720 18,000
Multiplied by:
Direct labor
rate P48 P48 P48 P48 −
Direct labor
cost P201,600 P274,560 P161,280 P226,560 864,000

Direct labor budget for packaging

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Planned
Production 105,000 143,000 84,000 118,000 450,000
Multiplied by:
Req’d DLH 0.02 0.02 0.02 0.02 −
Direct labor
hours needed
for production 2,100 2,860 1,680 2,360 9,000
Multiplied by:
Direct labor
rate P40 P40 P40 P40 −
Direct labor
cost P84,000 P114,400 P67,200 P94,400 360,000

The budgeted direct labor cost for each quarter are as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Direct labor
cost P285,600 P388,960 P228,480 P320,960 P1,224,000
Financial Planning and Analysis – The Master Budget JOR

The direct labor rate is usually the average rate associated with production. Since, there might be differing rates
for each individual workers.

Overhead Budget
The overhead budget contains the indirect items related to production. For the overhead budget, there is no input-
output relationship unlike with the direct material and direct labor budget. This is because the overhead contains
two types: variable overhead and fixed overhead.

Because overhead rates are usually the average cost of all indirect costs of production it is usually impracticable to
trace the input-out relationship between these costs.

Refer below for the illustration:

AngkaTeaMo’s budgeted overhead is as follows:

• The variable overhead is P35 per direct labor hour.
• The breakdown of the fixed overhead per quarter is as follows:
o Depreciation – P200,000
o Utilities – P130,000
o Rent – P220,000
o Warehouse Security – P125,000

Using the information above we can use the cost function to determine the overhead budget; y = a + b(x)

Budgeted overhead costs

First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Direct labor
hours* 6,300 8,580 5,040 7,080 27,000
Multiplied by:
VOH rate P35 P35 P35 P35 −
Budgeted
Variable
overhead P220,500 P300,300 P176,400 P247,800 P945,000
Budgeted fixed
costs P675,000 P675,000 P675,000 P675,000 P2,700,000
Budgeted
overhead costs P895,500 P975,300 P851,400 P922,800 P3,645,000

*Direct labor hours is obtained by adding the budgeted direct labor hours per production process (i.e., mixing and
packaging) per quarter.
Financial Planning and Analysis – The Master Budget JOR

Ending Inventory Budget

After we have determined the manufacturing costs based on the expected production. We are now able to
determine the unit cost of each inventory based on the preceding budgets (e.g., DM, DL, MOH). This budget is
also important to determine the cost of goods sold budget.

The direct material cost per unit is computed as

1. Required oolong tea per bottle x cost per ounce = 5 ounces x P12.5 = P62.5
2. Required black pearl per bottle x cost per gram = 20 grams x P1.5 = P30.0

Direct material cost per unit = P92.5

The direct labor cost per unit is computed as

1. Required hours during mixing per bottle x direct labor rate = 0.04 hours x P48 = P1.92
2. Required hours during packaging per bottle x direct labor rate = 0.02 hour x P40 = P0.80

Direct labor cost per unit = P2.72

The overhead costs per unit is computed as

1. Required activity x VOH rate = 0.06 hours x P35 = P2.1
2. Fixed costs / total expected production = P2,700,000 / 450,000 = P6.0

Overhead costs per unit = P8.1

The total unit cost is:

DM P92.50
DL 2.72
MOH 8.10
Unit cost P103.32

We just need to multiply the ending inventory in units to its unit cost to get the cost of ending inventory. Based on
the production budget, the planned ending inventory for the 4th quarter is 10,000 units.

Unit cost x ending inventory in units = P103.32 x 10,000 = P1,033,200

Financial Planning and Analysis – The Master Budget JOR

Cost of Goods Sold Budget

After developing the finished goods budget, we can now proceed with the construction of the cost of goods sold
budget.

AngkaTeaMo revealed that the cost of beginning inventory amounted to P525,500. Since the production cycle of
the company is very short, there are no beginning nor ending work-in-process inventory.

CGS Schedule
Direct Material P41,625,000
Direct Labor 1,224,000
Overhead 3,645,000
Total
Manufacturing
costs P46,494,000
Add: Beginning
Inventory,
Finished Goods P525,000
Cost of Goods
Available for Sale P47,019,000
Less: Ending
Inventory,
Finished Goods (P1,033,200)
Cost of Goods
Sold P45,985,800

Query: What if not all units put into production are finished? Let us assume the same given, but instead, AngkaTeaMo’s
production is somewhat inefficient and only finishes 90% of its goods put into process every year. If this is the case we need
to prepare the cost of goods manufactured budget. The WIP ending inventory for 2019 amounted to P4,350,000.

Schedule of Cost of Goods Manufactured and Cost of Goods Sold

CGM Schedule CGS Schedule
Direct Material P41,625,000 Cost of Goods
Direct Labor 1,224,000 Manufactured P45,759,600
Overhead 3,645,000
Total
Manufacturing
costs P46,494,000
Add: Beginning Add: Beginning
Inventory, WIP P4,350,000 Inventory, FG P525,000
Total Goods Put Cost of Goods
into Process P50,844,000 Available for Sale P46,284,600
Less: Ending Less: Ending
Inventory, WIP (P5,084,400) Inventory, FG (P1,033,200)
Cost of Goods Cost of Goods
Manufactured P45,759,600 Sold P45,251,400
Financial Planning and Analysis – The Master Budget JOR

Selling, General and Administrative Budgets

The SG&A budget is similar to the overhead budget as there is no established input-output relationship and
consists of both variable and fixed costs. Examples are, but not limited to, the following:
1. Sales commissions
2. Distribution costs
3. Freight
4. Marketing expenses
5. Depreciation of headquarters
6. Salaries of accountants and other support personnel

AngkaTeaMo provided the following information regarding its selling, general and administrative expnses:
• Selling expenses of P14 per unit sale
• Sales commissions of 5% of sales
• Marketing Expenses of P15,000 per month
• Depreciation of the building headquarters amounting to P750,000 per quarter
• Salaries of office personnel P350,000 per quarter.

SG&A Budget
First Quarter Second Quarter Third Quarter Fourth Quarter Annual
Unit Sales 100,000 150,000 80,000 120,000 450,000
Multiplied by: P14 P14 P14 P14
Selling costs
per unit −
Selling costs 1,400,000 2,100,000 1,120,000 1,680,000 6,300,000
Volume of sales P15,000,000 P22,500,000 P13,200,000 P19,800,000 P70,500,000
Multiplied by:
Selling
Commission
rate 5% 5% 5% 5% −
Budgeted Sales
Commissions 750,000 1,125,000 660,000 990,000 3,525,000
Budgeted
Variable SG&A P2,150,000 P3,225,000 P1,780,000 P2,670,000 9,825,000
Add: Budgeted
Fixed SG&A P1,145,000 P1,145,000 P1,145,000 P1,145,000 4,580,000
Budgeted
SG&A P3,295,000 P4,370,000 P2,925,000 P3,815,000 P14,405,000

Conventionally, we can express the SG&A as y = a + b(x).

Financial Planning and Analysis – The Master Budget JOR

Financial Budgets − The Cash budget

The cash budget is very important as having an understanding of cash flows is vital in management on how to
finance its current operations. The cash receipts and cash disbursements budgets show the estimated cash inflows
and cash outflows from revenues and expenses, respectively.

The cash budget is typically computed as follows:

Cash Budget
Beginning Cash Balance XX
Add: Cash Receipts XX
Cash available XX
Less: Cash disbursements (XX)
Less: Minimum cash
balance (XX)
Excess or (deficiency) of
cash XX/(XX)
Less: Loan/Interest
Repayments (XX)
Add: Loan proceeds XX
Add: Minimum cash
balance XX
Ending Cash Balance XX

Once the cash budget has been determined, the company can make plans on what to make of the deficiency or
investment of surpluses.

The Cash Receipts Budget

The cash receipts budget includes all expected sources of cash for the period. In our illustration, AngkaTeaMo
main source of cash would be its sales of milk tea. But we have to remember that not all sales would be in cash,
some of the sales would be on credit. Because of this it is important for an organization to determine the pattern
of collection from its receivables.

If an organization has been in the industry for a while, it may already have an idea on when the cash inflows will be
collected. The main task of any cash receipts budget is to anticipate cash collections, and one way to do that is to
prepare an accounts receivable aging. The aging schedule allows the company to estimate the cash inflows in the
months following the sales.

To illustrate:

Recall from the sales budget that during 2020, the following were the budgeted sales for each quarter:
Sales Budget
For the Year Ending December 31, 2020
First Quarter Second Third Quarter Fourth Annual
Quarter Quarter
Unit Sales 100,000 150,000 80,000 120,000 450,000
Selling price P150 P150 P165 P165 −
Sales P15,000,000 P22,500,000 P13,200,000 P19,800,000 P70,500,000

AngkaTeaMo’s experience is that 30% of the sales are cash sales, and the remaining are on credit. Of the sales on
account 80% are collected during the quarter of sale and the remaining 20% are collected in the quarter following
the sale.
Financial Planning and Analysis – The Master Budget JOR

Cash sales and credit sales for each quarter

Cash Sales P15M x 30% = P4,500,000
First Quarter
Credit sales P15M x 70% = P10,500,000
Second Cash Sales P22.5M x 30% = P6,750,000
Quarter Credit sales P22.5M x 70% = P15,750,000
Third Cash Sales P13.2M x 30% = P3,960,000
Quarter Credit sales P13.2M x 70% = P9,240,000
Fourth Cash Sales P19.8M x 30% = P5,940,000
Quarter Credit sales P19.8M x 70% = P13,860,000

Cash receipts budget

First Quarter Second Third Quarter Fourth Annual
Quarter Quarter
Cash Sales P4,500,000 P6,750,000 P3,960,000 P5,940,000 P21,150,000
Cash
collections
from sales
on:
4th quarter of
20191 2,772,000 − − − 2,772,000
1st quarter of
20202 8,400,000 2,100,000 − − 10,500,000
2nd quarter of
20203 − 12,600,000 3,150,000 − 15,750,000
3rd quarter of
20204 − − 7,392,000 1,848,000 9,240,000
4th quarter of
20215 − − − 11,088,000 11,088,000
Collections P15,672,000 P21,450,000 P14,502,000 P18,876,000 P70,500,000

1
P13,860,000 x 20% = P2,772,000; do this if the problem is silent, if there is a given sale for the prior year use that.
2
P10,500,000 x 80% = P8,400,000; P10,500,000 x 20% = P2,100,000
3
P15,750,000 x 80% = P12,600,000; P15,750,00 x 20% = P3,150,000
4
P9,240,000 x 80% = P7,392,000; P9,240,000 x 20% = P1,848,000
5
P13,860,000 x 80% = P11,088,000
Financial Planning and Analysis – The Master Budget JOR

Query: What if the ageing contains an allowance for uncollectible accounts? What would happen to the budgeted
collections? Let us assume the same given except that 60% is collected during the quarter of sale, 25% is collected during
the following quarter, 10% following the second quarter after sale. The remaining 5% is the allowance for uncollectible
accounts.

First Quarter Second Third Quarter Fourth Annual

Quarter Quarter
Cash Sales P4,500,000 P6,750,000 P3,960,000 P5,940,000 P21,150,000
Cash collections from sales on:
3rd quarter of
20191 924,000 − − − 924,000
4th quarter of
20192 3,465,000 1,386,000 − − 4,851,000
1st quarter of
20203 6,300,000 2,625,000 1,050,000 − 9,975,000
2nd quarter of
20206 − 9,450,000 3,937,500 1,575,000 14,962,500
3rd quarter of
20205 − − 5,544,000 2,310,000 7,854,000
4th quarter of
20216 − − − 8,316,000 8,316,000
Collections P25,689,000 P35,961,000 P23,731,500 P32,001,000 P117,382,5000

1
P9,240,000 x 10% = P924,000
2
P13,860,000 x 25% = P3,465,000; P13,860,000 x 10% = P1,386,000
3
P10,500,000 x 60% = P6,300,000; P10,500,000 x 25% = P2,625,000; P10,500,000 x 10% = P1,050,000
4
P15,750,000 x 60% = P9,450,000; P15,750,000 x 25% = P3,937,500; P15,750,000 x 10% = P1,575,000
5
P9,240,000 x 60% = P5,544,000; P9,240,000 x 25% = P2,310,000
6
P13,860,000 x 60% = P8,316,000

Notice that the 5% allowance for uncollectible account is not reflected in the cash receipts budget. This is because
there is no collections pertaining to the uncollectible accounts, they are instead presented under the budgeted
income statement as bad debts expense.
Financial Planning and Analysis – The Master Budget JOR

The Cash Disbursements Budget

This disbursement budget lists all the expected or planned outflows for the period. Any expenses with no
disbursement will not be included (e.g., amortization, depreciation, etc.).

The minimum cash balance is considered to be the cash reserves of the organization. This is the lowest balance of
cash acceptable by the entity.

Cash balances below the minimum acceptable balance would be considered to be a deficiency. If this is the case,
the company may need to make short-term loans to maintain the minimum balance. On the other hand, if there
are cash surpluses, meaning excess cash is available, the company may consider to repay loans or make temporary
investments.

So far we have discussed the operating cash flows of the cash budget. Looking at the cash budget below, there are
also the financing section of the cash budget, which are, obtaining loans and repayment of loans and interest.

Cash Budget
Beginning Cash Balance XX
Add: Cash Receipts XX
Cash available XX
Less: Cash disbursements (XX)
Less: Minimum cash
balance (XX)
Excess or (deficiency) of
cash XX/(XX)
Less: Loan/Interest
Repayments (XX)
Add: Loan proceeds XX
Add: Minimum cash
balance XX
Ending Cash Balance XX

The proceeds are added while the loan repayments are deducted to obtain the ending cash balance.

To illustrate the cash disbursement budget please refer to the following information below:
• AngkaTeaMo’s minimum cash balance is P1,500,000 every end of quarter. The beginning cash balance at
the end of December 31, 2019 is P1,580,000.
• All direct material purchases are made on account; 40% of the purchases are paid during the month of
purchase, while the remaining 60% is paid on the following quarter.
• The SG&A expenses are all paid every end of month.
• Conversion costs are also paid at the end of each month.
• The income tax of P3,032,760 is paid at the end of the year.
• AngkaTeaMo plans to purchase a machine to increase production capacity. The purchase is expected to
be made at the beginning of January 2020. The machine costs P2,200,000.
• The company also plans to expand its business to other parts of the country, it plans to purchase a plot of
land costing P5,800,000 during the 2nd quarter.
• Money can be borrowed and repaid in multiples of P100,000. Interest is 12% per annum. All borrowing
takes place at the beginning of the quarter, and all repayments takes place at the end of the quarter.
Interest payments are made at the end of each month.

Based on the following information, the cash budget is prepared in the next page.
Financial Planning and Analysis – The Master Budget JOR

The Cash Budget

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual
Beginning balance P1,580,000 P1,508,450 P1,539,090 P1,619,360 P1,580,000
Cash Sales P4,500,000 P6,750,000 P3,960,000 P5,940,000 P21,150,000
Collection from credit sales:
Current quarter P8,400,000 P12,600,000 P7,392,000 P11,088,000 P39,480,000
Prior quarter P2,772,000 P2,100,000 P3,150,000 P1,848,000 P9,870,000
Total cash available P17,252,000 P22,958,450 P16,041,090 P20,495,360 P72,080,000

Disbursements:
Purchase payments
Current quarter1 P4,025,600 P5,072,700 P3,233,800 P4,317,900 P16,650,000
Prior quarter1 P6,476,850 P6,038,400 P7,609,050 P4,850,700 P24,975,000
Direct labor P285,600 P388,960 P228,480 P320,960 P1,224,000
Overhead2 P695,500 P775,300 P651,400 P722,800 P2,845,000

SG&A3 P2,545,000 P3,620,000 P2,175,000 P3,065,000 P11,405,000

Income tax P3,032,760 P3,032,760

Capital Purchases P2,200,000 P5,800,000 P8,000,000
Total
Disbursements P16,228,550 P21,695,360 P13,897,730 P16,310,120 P68,131,760
Net Cash Available P1,023,450 P1,263,090 P2,143,360 P4,185,240 P3,948,240
Less: Minimum
cash balance P1,500,000 P1,500,000 P1,500,000 P1,500,000 P1,500,000
Cash
Surplus/(Deficiency) (P476,550) (P236,910) P643,360 P2,685,240 P2,448,240

Financing activities:
Loan proceeds P500,000 P300,000 − − P800,000
Repayments − − (P500,000) (P300,000) (P800,000)
Interest4 (P15,000) (P24,000) (P24,000) (P9,000) (P72,000)
Total Financing P485,000 P276,000 (P524,000) (P309,000) (P72,000)
Add: Minimum cash
balance P1,500,000 P1,500,000 P1,500,000 P1,500,000 P1,500,000
Ending Cash
balance P1,508,450 P1,539,090 P1,619,360 P3,876,240 P3,876,240

1
Obtained the material purchases from the direct material budget (Purchases x Expected Pattern of Payments).
2
Obtained from the overhead budget, after excluding the depreciation of P200,000 since there is no cash
disbursement associated with depreciation.
3
Obtained from the SG&A budget, after excluding the depreciation of P750,000 since there is no cash
disbursement associated with depreciation.
4
Computed as Principal x Interest rate x number of months P500,000 x 1% x 3 months = P15,000; The interest
on the P300,000 will start on the 2nd quarter, P300,000 x 1% x 3 months = P9,000.
Financial Planning and Analysis – The Master Budget JOR

Budgeted Financial Statements

The typical financial statements that we budget are the
1. Budgeted Balance Sheet
2. Budgeted Income Statement
3. Budgeted Cash Flows

Only the highlighted can be illustrated in the discussion since we have no other information pertaining to other
assets and liabilities of AngkaTeaMo. After preparing the operational and financial budgets, we are now able to
proceed with the preparation of the income statement and cash flows. Let us assume that the corporate income
tax applicable to the entity is 30%.

Budgeted Income Statement for the Year

Ended December 31, 2020
Sales1 P70,500,000
Less: Cost of Goods Sold2 45,985,800
Gross Profit P24,514,200
Less: Selling, General and
Administrative Expenses3 14,405,000
Operating Income 10,109,200
Less: Tax (30%) 3,032,760
Net Income P7,076,440

1
Obtained from the sales budget for 2020
2
Obtained from the CGS budget for 2020
3
Obtained from the SG&A budget for 2020

Cash flows obtained from the cash budget

Budgeted Statement of Cash Flows
for the Year Ended December 31, 2020
Cash flows from operating Net cashflow(outflow)
activities from investing activities
Cash receipts from
Cash receipts from sales P70,500,000 borrowings P800,000
Cash Disbursements Cash Disbursements
To suppliers (P41,625,000) Loan Repayments (800,000)
For direct labor (1,224,000) Interest Repayments (72,000)
For overhead Net cashflow(outflow)
(2,845,000) from financing activities (P72,000)
For SG&A (11,405,000)
For tax payments (3,032,760) Net Increase in cash and
PP2,296,240
Net cashflow/(outflow) cash equivalents
from operating activities P10,368,240

Cash flows from investing Cash and Cash

activities Equivalents, Beginning
Cash Disbursements P1,580,000
Purchase of machine 2,200,000
Purchase of land 5,800,000 Cash and Cash
P3,876,240
Net cashflow(outflow) from Equivalents, Ending
investing activities (8,000,000)
Financial Planning and Analysis – The Master Budget JOR

Behavioral Impact of Budgeting

Budgets typically affect a wide range of people: Those who prepared the budget, those who use the use the budget
for decision making and those who are evaluated using the budget. Human behavior might be affected when
budgets are being implemented.

Behavioral impacts might be positive in which, the budgets are implemented in a way that promotes goal
congruence. Goal congruence is when the manager and the organization work towards the same ultimate
outcome. On the other hand, budgets may also have a negative impact. This may happen in various ways, but
ultimately this is the conflict between goals of the individual and the goals of the organization, often referred to as
dysfunctional behavior.

An example regarding the dysfunctional behavior is when managers start to pad the budget. Padding the budget
means underestimating the revenues and overestimating the costs. This lessens the standard maintained and allows
for more errors and complacencies. The difference between the realistic budget and the padded budget is called
the budgetary slack.

Characteristics of a good budgetary system should include the following:

1. Periodic feedback of performance
2. Monetary and nonmonetary incentives
3. Participative budgeting
4. Realistic standards
5. Multiple measures of performance