Module 3 Budgeting

MODULE 3
BUDGETING
Intended Learning Outcomes (ILOs)
Mabuhay and welcome class to our Module 3: Budgeting.
Under this module, we will be learning about budgeting and the delicate preparation behind it.
But before we start, let us read about the ILOs.
Intended Learning Outcomes (ILOs):

At the end of the topic, the students are expected to be able to:
1. Understand budgeting and budget;

2. Prepare a master budget which includes

o sales budget,
o production budget,
o direct materials budget,
o direct labor budget,
o overhead budget,
o selling and administrative budget,
o cash budget,
o budgeted income statement,
o budgeted statement of financial position.
Budgeting and budget

Budget is a quantitative plan for acquiring and using financial and other resources to project the company's financial performance and financial
position in the forthcoming period.
Budgeting is the act of preparing a budget and the use of budget to control the company's operation is called Budget control.
Budgeting encompasses the planning and control function of the management.
1. Planning involves developing objectives and preparing budgets to attain those objectives.
2. Control involves the actions taken by management to mitigate risk and ensure the attainment of objectives.
Functional & activity-based budget or the master budget normally covers the company's accounting cycle and can be broken down into
monthly, quarterly, and semi-annually.
Master budget
In preparing for the master budget, we also need to consider other factors such as inflation rate, exchange rate, government policies, and the
country's economy.
The starting point of the company's master budget is the sales budget. The sales budget will set the objective of the company for a certain
period. An objective that is intended to be achieved.
We then need to take into consideration the production budget and the selling and administrative budget.
The components of the production budget are direct materials, direct labor, overhead budgets, and the ending
inventory.
Then, it is connected with the cash budget.
Finally, we can prepare the Budgeted income statement and the budgeted balance sheet.
Sales budget
Again, the sales budget is the starting point of the master budget.
We prepare the budget using the illustrative problem.
Remember, assumptions used in this activity are not always the assumptions to be used.
 The April budgeted sales are computed by multiplying the budgeted sales in units to the sales price per unit.
Cash receipts budget
Note: The P170,000 total cash collection for April is computed by getting the April collection of P140,000 and the P30,000 March 31 ending
balance of accounts receivable, which is assumed to be collected in the month of April.
Production budget
Note: The April required the production of 26,000 units is computed by adding the desired ending inventory of P10,000 to the budgeted sales
in units or the cost of sales in units of 20,000 to arrive the units available for sales of 30,000.
The 30,000 units available for sale is then deducted by 4,000 beginning balance units to arrive at the 26,000 units required production.
Direct materials budget

Note: The 140,000 materials to be purchased in April is computed by multiplying the materials to be used per unit to the required units of
production to arrive at 130,000 productions needed. The 130,000 productions needed is then added to the desired ending materials inventory
and deducted by beginning materials inventory.
Cash disbursement budget for Direct materials
Note: The P40,000 total cash disbursements for April is computed by getting the total paid on the April purchases amounting to P28,000 and
adding the paid March 31 balance of accounts payable amounting to P12,000.
Direct labor budget
Note: The P15,000 total direct labor costs for April is computed by multiplying the required labor hours paid for April of 1,500 hours to the
hourly wage rate of P10.
Further, the problem states that the company guarantees to pay at least 1,500 labor hours to all its direct labor workers regardless of the
workers work for less than 1,500 hours.
Manufacturing overhead budget
Note: The P76,000 total manufacturing cost for April and P56,000 cash disbursement for April are computed by multiplying the budgeted direct
labor hours of 1,300 to the variable overhead rate per hour of P20 to get the Variable cost of P26,000. The total variable cost of P26,000 is
then added to the total fixed cost of P50,000 to arrive at the total manufacturing cost of P76,000
Further note that the total manufacturing cost of P76,000 comprises of P20,000 noncash item, which you need to deduct to get the total cash
disbursement for the manufacturing cost of P56,000.
Ending finished goods budget

After computing for the total production cost (DM, DL, OH), we now apportion it to the sold portion as part of the cost of goods sold and unsold
portion as part of the ending finished goods inventory.
Take note the quantity is the budgeted quantity indicated in each of the budget reports and the related unit cost.
The unit cost and quantity are then multiplied to arrive at P2.00 direct materials per unit, P0.50 direct labor per unit, and P2.49 manufacturing
overhead per unit. The total product cost per unit is then multiplied to the units ending finished goods inventory to arrive at P24,950 ending
finished goods inventory.
Selling and administrative expense budget

Imagine your budgeted income statement.
The top line is the sales revenue. Are you done with the sales budget?
Next is the cost of goods sold. Have you already distributed the total product cost to the unsold portion and sold portion?
If all your answers are yes, then, we are now ready to prepare the Selling and administrative expense budget or the period cost portion.
Let us continue the Budget report of Enthusiasm Company.

Note: In computing for the P80,000 total selling and administrative expense for April, you need to multiply the budgeted sales in units to the
variable SAE per unit, then add the fixed SAE.
Since not all Selling and administrative expenses are paid in cash, we need to deduct the non-cash items. In this case, we deduct the P10,000
depreciation expense from the P80,000 total SAE to arrive at the cash disbursement for SAE.
Cash budget
After taking into account all the operating income of Enthusiasm Company, we continue solving the illustrative problem by preparing the cash
budget.
The P30,000 April cash balance is computed by:
1. Add the April cash collection of P170,000 to the beginning cash balance of P40,000 to arrive at the total cash available of P210,000.
2. Add all the cash disbursements from product costs, selling, and administrative expenses, and dividends. The total cash
disbursements are P230,000.
3. Since total disbursement is greater than the total cash available by P20,000, we had a negative cash balance. The negative cash
balance is very unlikely for the Cash budget and the projected ending cash balance for April is P30,000; the entity needs to borrow
P50,000 cash to attain the projected P50,000 ending cash balance for April.
Budgeted income statement
Take into consideration the budgeted sales in the unit for April and the related selling price per unit and product cost per unit to compute the
gross margin.
Selling and administrative are computed already in the SAE budget and do not forget that we incur P2,000 interest expense from the P50,000
borrowing.
Always take note of the movement or the transactions involved in the retaining earnings. The above computation depicts the transactions
related to retained earnings.
Budgeted Statement of financial position

Use these schedule format to compute for the remaining account balances:
Take note that preparing a master budget is a step and step process and is interconnected at the same time.
It would take a lot of patience and mastery to come up with a master budget but do not forget to incorporate, the events and issues happening
inside and outside the entity such as government policy, the economy of the country, and even a current pandemic. All these factors will make
the master budget more reliable and more relevant.
Hope you understood this step by step process and you can apply it on your project feasibility study in the future.
Summary
1. Budget is a quantitative plan for acquiring and using financial and other resources to project the company's financial performance
and financial position in the forthcoming period.
2. Budgeting is the act of preparing a budget and the use of budget to control the company's operation is called Budget control.
3. Functional & activity-based budget or the master budget normally covers the company's accounting cycle and can be broken down
into monthly, quarterly, and semi-annually.
4. In preparing the master budget, the starting point is the sales budget. Afterward, we prepare the production budget. The
components of the production budget are further detailed to direct materials budget, direct labor budget, overhead budgets, and the
ending inventory. The selling and administrative budget are next. Then, it is connected with the cash budget. Finally, prepare the
Budgeted income statement and the budgeted balance sheet.

Module 3 Budgeting

Uploaded by

Copyright:

Available Formats

Module 3 Budgeting

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 3 Budgeting

Uploaded by

Copyright:

Available Formats

MODULE 3

Intended Learning Outcomes (ILOs)

Mabuhay and welcome class to our Module 3: Budgeting.

But before we start, let us read about the ILOs.

Intended Learning Outcomes (ILOs):

1. Understand budgeting and budget;

Budgeting and budget

Budgeting encompasses the planning and control function of the management.

Then, it is connected with the cash budget.

We prepare the budget using the illustrative problem.

Direct materials budget

Cash disbursement budget for Direct materials

Direct labor budget

Ending finished goods budget

Selling and administrative expense budget

Let us continue the Budget report of Enthusiasm Company.

Budgeted income statement

Budgeted Statement of financial position

You might also like