Personal Property of Servitech Institute Asia Inc. Strictly confidential.

Personal Property of Servitech Institute Asia Inc. Strictly confidential.

LESSON 4 : PROJECTED BUDGETS PREPARATION

TYPES OF BUDGET

1. Sales Budget is the most important financial statement account in forecasting. It is a financial plan that
shows how the resources should be allocated to achieve forecasted sales. It contains an itemization of a
company’s sales expectations for the budget period.

Formula: Forecasted Unit Sales

x Price per Unit
Total Gross Sales
- Sales Discounts and Allowances
Total Net Sales

Example: ABM Financial Manager expects that there will be an increase in demand for the next half of the
year and an increase in price from Php30.00 to Php40.00. And also expects the company’s historical sales
discounts and allowances percentage of two percent of gross sales will continue through the budget
period.
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Forecasted Unit 4500 5000 6000 7000
Sales
X Price Per Unit P30 P30 P40 P40
Total Gross Sales P135,000 P150,000 P180,000 P280,000
- Sales Discounts P2,700 P3,000 P3,600 P5,600
and Allowances
Total Net Sales P132,300 P147,000 P176,400 P274,400

2. Projected Collection refers to the calculation of expected cash collections based on the total sales figure
obtained from the sales budget. The management estimates the proportion in which sales are expected to
be collected in the current and following periods. This is used to determine how much sales are expected
to be collected during a period.

Example:

ABM financial manager shows the projected collection. The sales figures are obtained from the projected
sales budget of the company. Based on the past accounting reports , 70% of sales are expected to be
collected in the quarter in which sales are made and the rest are expected to be collected in the next
period.

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Beginning, P55,000
Accounts
Receivable
Quarter 1 Sales P92,610 P39,690
Quarter 2 Sales P102,900 P44,100
Quarter 3 Sales P123,480 P52,920
Quarter 4 Sales P192,080
Total Collections P147,610 P142,590 P167,580 P245,000
Personal Property of Servitech Institute Asia Inc. Strictly confidential.

3. Production Budget provides information regarding the number of units that should be produced over a
given accounting period based on expected sales and targeted level of ending inventories

Formula: Expected Sales

+ Target Ending Inventories
Total Production Required
- Beginning Inventories
Units to be Manufactured

Example:

Target Ending Inventory for each quarter is 10% of the forecast unit sales for the next quarter.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Forecasted Unit 4500 5000 6000 7000 22500
Sales
+ Target Ending 500 600 700 0 1800
Inventory Units
Total 5000 5600 6700 7000 24300
Production
Required

- Beginning 1000 500 600 700 2800

Inventory
= Units to be 4000 5100 6100 6300 21500
Manufactured

Steps in Formulating Budget

1. Obtaining Estimates
2. Coordinating Estimates
3. Communicating Budget
4. Implementing the Budget Plan
5. Reporting Interim Progress towards Budgeted Objectives