Budget Preparation

Prepared by:
Jerome B. Tandoc, LPT
Budget
 is a statement of projected sales, expenses,
income, and other financial transactions for
the coming period.
It is a firm’s financial plan.
It is a tool for planning and control.
SWOT Analysis
S – trengths
W - eaknesses
O – pportunities
T – hreats
SWOT Analysis
INTERNAL ORIGIN
Strengths Weaknesses
What characteristics of What characteristics of
your business put it at your business put it at
advantage compared to disadvantage compared
others? to others?
Example:
Example:
Lack of staff motivation &
Skilled Staff
commitment
High Quality of Product Cash flow problems
SWOT Analysis
EXTERNAL FACTORS
Opportunities Threats
What external factors What external factors
may impact your may impact your
business positively? business negatively?
Example: Example:
New technology in the market Inconsistencies in keeping up
Few competitors Several competitors
Budget Preparation includes the following
steps:
1. Prepare the sales forecast.
2. Determine the production volume in support of the
sales forecast.
3. Estimate the manufacturing costs and operating
expenses.
4. Estimate cash flow.
5. Prepare financial statements.
 Two Types of Budget Preparation

1. Operating Budget
2. Financial Budget
Operating Budget
 is a detailed projection of all income and
expenses for a given period of time, which is
usually one year.
Several Components of Operating Budget
1. Sales Budget
2. Production Budget
3. Direct Materials Budget
4. Direct Labor Budget
5. Factory Overhead Budget
6. Ending Inventory Budget
7. Selling and Administrative Budget
1. Sales Budget
 indicates the number of units a firm expect
to sell. It is the determinant of all the other
budgets included in the master budget.
Example:
 Schedule of Expected Cash Collection
Assumptions:
1. The entire balance of Php 10,000 (given) from the
previous year is collected in the first quarter of the
current year.
2. Sixty percent (60%) of the current quarter’s sales is
collected in the quarter when the sales took place.
The remaining 40% is collected in the next quarter.
2. Production Budget
 firms prepare a production budget to guide
them on the quantity of products that must be
produced. This derived by considering the forecast
on sales and the firm’s target ending inventory.
Formula:
Expected = Planned Sales + Desired Ending – Beginning
Production Volume Inventory Inventory
Assumptions:
1. In this case, the desired ending inventory was arbitrarily
set at 150. In some firms, it is set as a percentage of the
next period’s planned sales. For instance, if the planned
sales for the first quarter of next year is 2,000, the desired
ending inventory by the end of the current year is 200.
2. The beginning inventory for a given quarter is the same
as the previous quarter’s ending inventory. The beginning
inventory of 100 in quarter 1 was carried over from the
previous year.
 3. Direct Materials Budget
 is a summary of the quantity of direct
materials required in order to meet
production requirements.

Formula:
Purchased = Usage + Desired Ending Inventory – Beginning Inventory
in Units of Materials of Materials
Assumptions:
1. Every unit produced requires 3 units of raw
materials.
2. The desired ending inventory of materials is 10% of
the material needs for production for the next
quarter.
3. Material needs for production in the first quarter of
the following year is 3,000.
Assumptions:
1. The account to Php 3,000 from the previous year
was paid in the first quarter of the current year.
2. Fifty percent (50%) of a quarter’s purchases are
paid in the quarter and the balance paid in the next
quarter.
4. Direct Labor Budget
the estimate or projection on how much to produce
(production budget) will be used in order to come up
with the estimate for the labor requirements and how
much to budget for the direct labor cost.
Assumption:
Every unit produced required 3 hours to make.
5. Factory Overhead Budget
 it refers to manufacturing expenses other than
direct materials and direct labor. It is part of
factory overhead budget but it must be deducted
from the total budgeted overhead when
computing the projected cash disbursement for
overhead.
Assumptions:
1. The variable overhead rate is at Php 2 per direct
labor hour.
2. The fixed overhead budget is Php 5,000 per
quarter.
3. Depreciation is Php 2,500 per quarter.
6. Ending Inventory Budget
 it is necessary for constructing the
budgeted statement of comprehensive
income and the budgeted statement of
financial position.
7. Selling and Administrative Expense
Budget
 selling and administrative expenses are
operating costs that are not associated with
production. These operating costs incurred in
selling and in managing the business.
Thank you!!!

Prepared by:
Jerome B. Tandoc, LPT