Continuing Professional Development Module

Budgeting: Basics and Beyond

BASIC CONCEPTS
What is Budgeting?

Budgeting is the
process to develop:
• A formal written statement

• of management plans for the

future

• expressed in financial terms

Purpose of Budgeting

Control of
Planning
operations

Providing Facilitates
BUDGETS Incentives Communication

Performance Encourage
Evaluation Coordination
Budget vs. Budgeting

• Process to create Budgets

Budgeting •
•
Allocation of Funds
Cause

• Result of the Budgeting Process

Budget •
•
Documents the Allocation of Funds
Effect
Budgeting vs. Planning

PLANNING
Year 1 Year 2 Year 3 Year 4 Year 5

Budgets Budgets Budgets Budgets Budgets

CONTROLLING
How do I know when my budget is effective?

Predictive Valu
e

r Co m mu nications
Bette
Timely and Reli
able Informatio
n

rsta nd a b ility o f Information

Unde
all le v e ls o f O rganization
Support at
G
EFFECTIVE BUDGETIN
Limitations of Budgeting

1 Only estimates not statements of facts

2 No substitute for sound management practices

3 Regular amendment is necessary when there are changes

4 Does not guarantee success

5 People’s behaviour may undermine the value of the process

Types of Budgets

Budgets

Master
Capital Budget
Budget

Operations Financial
Budget Budget
Types of Budgets

An overall
financial plan for
the forthcoming Budgets
calendar or fiscal
year

Master
Capital Budget
Budget

Operations Financial
Budget Budget
Types of Budgets
Deals with the
activities affecting
the company’s Budgets
profit which
includes the
revenue and costs

Master
Capital Budget
Budget

Operations Financial
Budget Budget
Types of Budgets

Budgets

Master
Capital Budget
Budget

Examines the
Operations Financial expected assets,
Budget Budget liabilities and
equity of the
company
Types of Budgets
Involves long term
projects for fixed
Budgets assets acquisition.
It usually spans
for about 3 to 10
years

Master
Capital Budget
Budget

Operations Financial
Budget Budget
Classes of Budgets

Static Budget Flexible Budget

Approaches in Budgeting
Rolling Budget

Also called as Continuous Budget, one that is continually updated by periodically

adding a new incremental period and dropping the just completed

Year 1(Y1) January to December ( Y1) ADD

Year 2(Y2) DROP February (Y1) to January (Y2)
Zero-based
Zero-based
Budget

Sets initial figures for each activity at zero. Budgets for the next period are made
without reference to previous period
Budget
Period Budget

Budgets that are developed for a specific period of time. For example a year, a
month or a week.
Period
Budgetary Process
Budgeting Process

Setting Objectives

Analysing Available Resources

Negotiating to estimate budgeting components

Coordinating and Reviewing Components

Obtaining Final Approval

Distributing the approved budget

Bottom-up vs. Top-down

BOTTOM-UP APPROACH

- Commonly used in - Commonly used in long

operational planning range planning
- Participation of lower - Centralized to top

TOP-DOWN APPROACH
levels of management management
- Employees are highly - Targets are only
motivated communicated to the
- Greater accuracy of lower management
budget estimates - Lesser support to budget
estimates
STEP BY STEP PROCESS
OPERATIONAL BUDGET
1
REVENUE BUDGET

Production Budget Selling and Administrative Budget

Materials Labor Overhead

Budgeted
Income Statement
STEP BY STEP PROCESS
OPERATIONAL BUDGET FINANCIAL BUDGET
1
REVENUE BUDGET

Cash Budget
Selling and Production
Administrative Budget
Budget
Ending Inventory
Budget (WIP/FGI)

Overhead Labor Materials

Ending Inventory
Budget (RMI)

Budgeted Budgeted
Income Balance
Statement Sheet

RE
STEP BY STEP PROCESS
STEP 1 STEP 2 STEP 3 STEP 4 STEP 5
Determine Formulate
Preparing Expected Estimate Determine Cash
Projected
Flow and Other
Sales Forecast Production Costs Financial Effects
Financial
Volume Statements

Materials,
Labor, Budgeted
Revenue Factory Balance
Production Cash
Overhead Sheet and
Budget Budget (FOH) and Budget Income
S&A Expense Statement
Budget
Illustrative samples
Illustrative Samples

Background:
Blackie Company was incorporated on January 18, 1994. It is engaged in the
production and sale of shoes. The company is in the process of making its budget for
the coming year 2017. Pertinent information are available in the succeeding slides .

Objective:
Prepare schedules for the following:
1. Sales Budget and Expected Cash Collections
2. Production Budget (Materials, Labor, Factory Overhead(FOH))
3. Ending Inventory Schedules
4. Selling and Administrative Expense Budget (S&A)
5. Cash Budget
6. Projected Income Statement
7. Projected Balance Sheet
Illustrative Samples
SALES BUDGET
Blackie Company is preparing budgets for the year ending December 31, 2017.
• The sales manager expects sales for the succeeding quarters as follows:
First Quarter 5,000 units
Second Quarter 5,500 units
Third Quarter 5,800 units
Fourth Quarter* 8,200 units
First Quarter- 2018 5,200 units
Second Quarter- 2018 5,400 units

• The sales price per unit is P100.00 per unit

• Sales Revenue are expected to be collected as follows

70% at the quarter when sales are made
30% at the quarter following
*peak season

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Sales Budget
For the year ending December 31, 2017

Q1 Q2 Q3 Q4 Year
Expected Sales in 5,000 5,500 5,800 8,200 24,500
Units*
Unit Selling Price* 100.00 100.00 100.00 100.00 100.00
Total Sales P500,000 P550,000 P580,000 P820,000 P2,450,000

• Given

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Schedule of Expected Cash Collections
For the year ending December 31, 2017
Q1 Q2 Q3 Q4 Year
AR(12/31/2016)* P196,000 P196,000
Q1(500,000) 350,000 150,000 500,000
Q2(550,000) 385,000 165,000 550,000
Q3(580,000) 406,000 174,000 580,000
Q4(820,000) 574,000 574,000
Total Collections P546,000 P535,000 P571,000 P748,000 2,400,000

• Assumed

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples

PRODUCTION BUDGET
The Production Manager estimates the following ending inventories that would satisfy the
volume requirements of the upcoming year:
Finished Goods 10% of the following quarter’s sales
Raw Materials 20% of the following quarter’s volume requirements

For simplicity, any work in process are considered negligible.

Furthermore, the company’s financial statements as of December 31, 2016 show the
following ending balances:
Finished Goods 400 units P17,000
Raw Materials 2000 units P16,000
Total P33,000

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Production Budget
For the year ending December 31, 2017
Q1 Q2 Q3 Q4 Year
Sales In Units 5,000 5,500 5,800 8,200 24,500
Add: Desired Ending
Inventory* 550 580 820 520 520
GAS** 5,550 6,080 6,620 8,720 25,020
Less: Beginning
Inventory*** 400 550 580 820 400
Units to be produced 5,150 5,530 6,040 7,900 24,620
* 10% of the next quarter’s sales
** Goods Available for Sale
*** Balance Forwarded

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
MATERIALS BUDGET
• The production records of Blackie Company show that there is a 2:1 ratio
between raw materials and finished goods.

• Materials cost is recorded at P8.00 per unit and will not be expected to
change in the upcoming year.

• Inventory balances relating to raw materials are presented in the production

budget
• Materials purchases are paid as follows
60% in the quarter incurred
40% in the quarter following

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Materials Budget
For the year ending December 31, 2017
Q1 Q2 Q3 Q4 Year
Units to be produced 5,150 5,530 6,040 7,900 24,620
Materials per unit 2 2 2 2 2
Materials Requirement 10,300 11,060 12,080 15,800 49,240
Add: Desired Ending * 2,212 2,416 3,160 2,088 2,088
Available for use 12,512 13,476 15,240 17,888 51,328
Less: Beginning Invty ** 2,000 2,212 2,416 3,160 2,000
Materials to Purchase 10,512 11,264 12,824 14,728 49,328
Unit Cost 8 8 8 8 8
Cost of Purchases 84,096 90,112 102,592 117,824 394,624
* 20% of the next quarter’s volume requirements
** Balance Forwarded

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Materials Budget(UNITS)
Q1-2018 For the year ending December 31, 2017
Sales 5,200
E.I 540 Q1 Q2 Q3 Q4 Year
GASUnits 5,740
to be produced 5,150 5,530 6,040 7,900 24,620
B.IMaterials
(520)
per unit 2 2 2 2 2
Prod. 5,220
Materials Requirement 10,300 11,060 12,080 15,800 49,240
Add: Desired Ending 2,212 2,416 3,160 2,088 2,088
MAU* Q1-2018 12,512 13,476 15,240 17,888 51,328
Prod. 5,220
Less: Beginning Invty. 2,000 2,212 2,416 3,160 2,000
Mat/FG 2
Materials to Purchase 10512 11264 12824 14728 49,328
Mat. Req. 10,440
Req. % .20
Mat. Invty 2,088

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Schedule of Expected Cash Disbursements on Materials Purchases
For the year ending December 31, 2017
Q1 Q2 Q3 Q4 Year
AP(12/31/2016)* 52,506 52,506
Q1(84,096) 50,458 33,638 84,096
Q2(90,112) 54,067 36,045 90,112
Q3(102,592) 61,555 41,037 102,592
Q4(117,824) 70,694 70,694
Total Payments 102,964 87,705 97,600 111,731 400,000

• Assumed

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples

LABOR BUDGET

• Per Blackie Company’s production records, each unit of product

requires 0.2 hours of direct labor

• Workers are paid P25.00 per hour

• For simplicity, any increase in salaries is ignored

• Labor costs are paid on the quarter incurred

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Labor Budget
For the year ending December 31, 2017

Q1 Q2 Q3 Q4 Year
Units to be produced 5,150 5,530 6,040 7,900 24,620
DLH per unit* .2 .2 .2 .2 .2
Direct Labor Hour 1,030 1,106 1,208 1,580 4,924
Labor Rate* 25.00 25.00 25.00 25.00 25.00
DIRECT LABOR COST P25,750 P27,650 P30,200 P39,500 P123,100
• GIVEN

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples

OVERHEAD BUDGET
• Blackie Company’s production manager ascertained that the cost formula for
Factory overhead for each quarter would be y = 10x + 120,000 where;
y = Total overhead
x = Budgeted DL Hours
10x = Total Variable Overhead(VOH)
120,000 = Total Fixed Overhead(FOH)

• Variable Overhead includes indirect labor and indirect materials

• All overhead involve cash outlay except depreciation worth ₱50,000

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Overhead Budget
For the year ending December 31, 2017

Q1 Q2 Q3 Q4 Year
Direct Labor Hours 1,030 1,106 1,208 1,580 4,924
VOH rate P10 P10 P10 P10 P10
Total Variable OH 10,300 11,060 12,080 15,800 49,240
Add: Fixed OH 120,000 120,000 120,000 120,000 480,000
Total Factory OH P130,300 P131,060 P132,080 P135,800 P529,240
Less: Depreciation 50,000 50,000 50,000 50,000 200,000
Cash FOH P80,300 P81,060 P82,080 P85,800 P329,240

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Ending Inventory Budget
For the year ending December 31, 2017
Inventory Quantity Unit Cost Cost
Finished Goods 520 units P 42.50 * P 22,100
Materials 2088 units 8.00 16,704
TOTAL 38,804
*The unit product cost of P42.50 is computed as follows:
Materials 2 units P8.00/unit P16.00
Labor 0.2 hour 25.00/hour 5.00
Overhead 0.2 hour 107.48/hour ** 21.50
TOTAL P42.50
**Budgeted FOH/Budgeted DL Hours= P529,240/4,924 hours= P107.48

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

• Blackie Company’s sales and administrative manager ascertained that the cost
formula for Selling and Administrative expenses(S&A) for each quarter would be
y = 15x + 200,000 where:
y = Total (S&A) Expense
x = Budgeted Sales Volume
15x = Total Variable (S&A) Expense
200,000 = Total Fixed (S&A) Expense

• Variable (S&A) includes Sales Commission, Shipping and Supplies Expenses

• Fixed(S&A) includes Advertising Expenses, Utilities, Depreciation, Rent and
Other Non-variable expenses
• All (S&A) are paid at the quarter incurred except Depreciation worth P80,000.

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Selling and Administrative Expense Budget
For the year ending December 31, 2017

Q1 Q2 Q3 Q4 Year
Budgeted Sales 5,000 5,500 5,800 8,200 24,500
VS&A rate P15 P15 P15 P15 P15
Total Variable S&A 75,000 82,500 87,000 123,000 367,500
Add: Fixed S&A 200,000 200,000 200,000 200,000 800,000
Total S&A P275,000 P282,500 P287,000 P323,000 P1,167,500
Less: Depreciation 80,000 80,000 80,000 80,000 320,000

Cash S&A P195,000 P202,500 P207,000 P243,000 P847,500

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
CASH BUDGET
• Blackie Company has an open line of credit with its bank, which are intended to
cover cash shortfall.

• The Company desires to maintain a P50,000 minimum balance at the end of each
quarter. Therefore, borrowing must be sufficient to cover the cash shortfall and
to provide for the minimum cash balance of P50,000.00

• All borrowings and repayments must be in multiples of P1,000 amounts, which

are made at the beginning of the quarter, and are subject to 10% interest per
annum.

• Interest is computed and paid at the time of repayment.

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Cash Budget
For the year ending December 31, 2017

Schedule Step Q1 Q2 Q3 Q4 Year

Balance, Beginning (a) P83,014* P50,000 P109,210 P213,330 P83,014
Add: Cash Receipts (b) 1 546,000 535,000 571,000 748,000 2,400,000
Less: Disbursements
Materials 3.1 102,964 87,705 97,600 111,731 400,000
Labor 3.2 25,750 27,650 30,200 39,500 123,100
Overhead 3.3 80,300 81,060 82,080 85,800 329,240
S&A Expense 3.4 195,000 202,500 207,000 243,000 847,500
Acquisitions Given 250,000 - 50,000 - 300,000
Total Disburse.(c) 654,014 398,915 466,880 480,031 1,999,840
Minimum Bal. 50,000 50,000 50,000 50,000 50,000
Cash Requirement (d) 704,014 448,915 516,880 530,031 2,049,840
Cash Surplus (Deficit) (a+b-d) (P75,000) P136,085 P163,330 P431,299 P433,174
*Previous Year Balance (forward)
Illustrative Samples

(forward)
Schedule Ref Q1 Q2 Q3 Q4 Year
Finance:

Borrowing 4 P75,000 - - P75,000

Repayment (75,000) - - (75,000)

Interest (1,875) - - (1,875)

Effect of Financing(e) 75,000 (76,875) - - (1,875)

Balance, Ending (a+b-c+e) P50,000 P109,210 P213,330 P481,299 P481,299

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples

Blackie Company
Budget Income Statement
For the year ending December 31, 2017
Step Q1 Q2 Q3 Q4 Year

Revenue 1 P500,000 P550,000 P580,000 P820,000 P2,450,000

Costs of Sales 3 (232,075) (245,915) (248,720) (314,450) (1,041,160)

Gross Profit 267,925 304,085 331,280 505,550 1,408,840

S&A Expense 3 (275,000) (282,500) (287,000) (323,000) (1,167,500)

Interest Expense 4 (1,875) - - - (1,875)

Net Income (P8,950) P21,585 P44,280 P182,550 P239,465

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Cost of Sales Budget
For the year ending December 31, 2017

Schedule Step Q1 Q2 Q3 Q4 Year

Materials Used* 3 P82,400 P88,480 P96,640 P126,400 P393,920
Direct Labor 3 25,750 27,650 30,200 39,500 123,100
Factory Overhead 3 130,300 131,060 132,080 135,800 529,240
Manufacturing Cost 238,450 247,190 258,920 301,700 1,046,260
Finished Goods, Beg.** 2 17,000 23,375 24,650 34,850 17,000
Goods Available for Sale 255,450 270,565 283,570 336,550 1,063,260
Finished Goods, End.** 2 (23,375) (24,650) (34,850) (22,100) (22,100)
COST OF GOODS SOLD*** P232,075 P245,915 P248,720 P314,450 P1,041,160
*Materials Requirement times Unit Materials Cost(P8.00) (forward)
**Desired Inventory times Unit Cost(P42.50)
*** difference due to rounding

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Illustrative Samples
Blackie Company
Budget Balance Sheet
December 31, 2017
Step 2017 Step 2016 % Change
ASSETS
Cash 4 P 481,299 4 83,014 480.00%
Accounts Receivable 4 246,000 4 196,000 25.51%
Inventories 2 38,804 2 33,000 17.59%
Current Assets P 766,103 312,014 145.53%
Property Plant and Equipment 67,986 Assumed 287,986 (76.39%)
TOTAL ASSETS 834,089 600,000 39.01%
LIABILITIES
Accounts Payable 4 P 47,130 4 52,506 (10.24%)

SHAREHOLDERS EQUITY
Contributed Capital Assumed 300,000 Assumed 300,000 0.00%
Retained Earnings 486,959 Assumed 247,494 96.76%
TOTAL LIABILITIES AND SHE 834,089 600,000 39.01%

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

End of Topic