Financial Planning (Budgeting)

Budgeting – the process of developing a formal written statement of the management

plans for the future, expressed in financial terms.

Budgets – a formal plan expressed in financial terms, which documents the allocation of
funds across the different departments of the company.

Purpose of Budgeting:
- Planning
- Facilitating communication
- Encourage coordination of all departments
- Provide incentives
- Control of operations
- Performance evaluations
- Satisfy legal and contractual requirements

Budgetary Process:
1. Setting the objectives
2. Analyzing the available resources of company
3. Negotiating to estimate budget components
4. Coordinating and reviewing budget components
5. Obtaining final approval
6. Distribution of the approved budget

Advantages and Limitations of Budgeting

Advantages Limitations
It forces managers to plan for the future. Considerable time and costs are required.
It provides a means of communicating Budgets are merely estimates that require
management’s plans throughout the judgment and might be modified or revised
entity. if necessary.
It directs the activities toward the A successful budgetary system requires
achievement of organizational goals. cooperation of all members of the
organization
It coordinates the activities of the entire Budgets sometimes restrict the flexibility of
entity by integrating plans of various parts. the decision making process.
It provides a means of allocating resources The budget program is merely a guide, not
to segments efficiently and effectively. a substitute for good management ability.
It defines goals that serve as benchmarks
for evaluating subsequent performance.
Terminologies

Master Budget – represents the overall plan of the organization for the forthcoming year.
It consists of all the individual budgets for each of the segment of the organization
aggregated or consolidated into one overall budget for the entire firm.

Operations Budget – budget prepared for activities affecting the company’s revenues and
expenses.

Financial Budget – the budget which examines the planned level of the assets, liabilities,
and equity of the company.

Capital Budget – involves long-term projects for fixed assets acquisition.

Fixed Budget – a budget prepared for a one level of activity within a certain period.

Flexible Budget – a budget prepared for different levels of activity within a certain period.

Continuous Budget – a 12 month budget that rolls forward one month as the current
month is completed.

Zero-Based Budgeting – a method of budgeting in which managers are required to justify

all costs as if the programs involved were being proposed for the first time.

Imposed Budgeting – a process wherein budgets are prepared by top management with
little or no inputs from operating personnel.

Participatory Budgeting = a process wherein budgets are developed through joint

decisions by top management and operating personnel.

Budget Committee – a group of key management person responsible for over-all policy
matters relating to the budget program and for coordinating the budget preparation.

Budget Manual – this describes how a budget is prepared and includes a planning
calendar and distribution instructions for all budget schedules.
Problem 1: Uniklo Company is developing its budgets for 2021 and, for the first time, will
use the kaizen approach. The initial 2021 income statement, based on static data from
2020, is as follows:
Sales (140,000 units) P420,000
Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes P28,000
depreciation) 112,000
Net income P28,000
Selling prices for 2021 are expected to increase by 8%, and sales volume in units will
decrease by 10%. The cost of goods sold as estimated by the kaizen approach will
decline by 10% per unit. Other than depreciation, all other operating costs are expected
to decline by 5%.

Requirements: Prepare a kaizen-based budgeted income statement for 2021.

Problem 2: Baguio Company sells fruit-flavored colas. Estimated sales in cartons for
May, June, July and August are 8,000, 12,000, 15,000 and 16,500 respectively. The
price is forecast at P500 per carton. Pampanga Company requires that finished goods
ending inventory be 30 percent of the next month's sales. The inventory was 2,500
units on May 1. Each carton requires 12 oz of fruit syrup. Materials ending inventory
is 20 percent of the next month's production needs. May 1 inventory met that
requirement.
Requirements: Compute the following for the month of May and June:

1. Budgeted production
2. Budgeted purchase of materials

Problem 3: The sales manager of Old Merchandising has budgeted the following sales
for the 4th quarter of 2022:
October P 123,500
November P 156,000
December P 208,000
Other budgeted estimates are:
- All merchandise is to sell at its invoice cost plus 30% mark-up.
- Beginning inventories of each month are budgeted at 40% of that month’s
projected cost of goods sold.
Requirements:
1. Projected merchandise purchases for the month of October.
2. Projected merchandise purchases for the month of November.
Problem 4: Mickey Mouse, Inc., a manufacturer of salsa, has the following historical
collection pattern for its credit sales: 70 percent collected in the month of sale, 15
percent collected in the first month after sale, 10 percent collected in the second month
after sale, 4 percent collected in the third month after sale and 1 percent uncollectible.
The sales on account have been budgeted for the last seven months of the year as
follows:
June P490,000 October 700,000
July 900,000 November 850,000
August 600,000 December 800,000
September 1,000,000
Requirements:

1. Compute the estimated total cash collections during October from credit sales during
the year.
2. Compute the estimated total cash collections during the fourth quarter from sales
made on account during the fourth quarter.
3. Compute the estimated total cash collections during the fourth quarter from sales made
on account during the year.

Problem 5: You have been asked to prepare a June cash budget for Flex Company,
a distributor of Sports equipment. The following information is available about the
company’s operations: The actual sales for the months of April and May and expected
sales for June are:

April May June

Cash Sales P 65,000 P 70,000 P 83,000
Account Sales P 400,000 P 525,000 P 600,000

Sales on account are collected over a three-month period in the following ratio: 20%
collected in the month of sales, 60% collected in the month following sale, and 18%
collected in the second month following sale. The remaining 2% is uncollectible.

Other information:

a. The cash balance on June 1 will be P40,000.

b. Purchases of inventory will total P280,000 for June. Thirty percent of a month’s
inventory purchases are paid during the month of purchase. The accounts payable
remaining from May’s inventory purchases total P161,000, all of which will be paid
in June.
c. Selling and administrative expenses are budgeted at P430,000 for June. Of this
amount, P50,000 is for depreciation.
d. A new computer for the Marketing Department costing P76,000 will be purchased
 for cash during June, and dividends totaling P25,000 will be paid during the month.
e. The company must maintain a minimum cash balance of P25,000. An open line
credit is available from the company’s bank to maintain the cash level requirement.

Requirements:

1. Prepare a schedule of expected cash collections for June.

2. Prepare a schedule of expected cash disbursements in June for inventory purchases.
3. Prepare a cash budget for June. Indicate in the financing section any borrowing
that will be needed during the month of June.

-End-