SHORT-TERM BUDGETING

Management is about persuading people to do things they do not want to do, while leadership is about
inspiring people to do things they never thought they could do. -Steve Jobs

Management is doing things right; leadership is doing the right thing. -Peter Drucker

Organizational purpose - Organizations should have a purpose to exist. They have goals to accomplish.
Strategic goals are set by the corporate BOD and are implemented by the executive and operating
officer.

MANAGING ORGANIZATION IS MANAGING MEN!

CEO - Is primarily responsible in attaining the objectives of the organization.

Organizational resources - Consists of money, men, materials, machines, market, methods,

technology and network.

CHALLENGE FACED BY CEO

The fundamental challenge faced by the CEO in managing organizational affairs is communication.

THE KEY TO MANAGING IS EFFECTIVE COMMUNICATION!

 First, there must be organizational purposes

 Second, the strategy to accomplish the purpose
 And then, the organizational structure.

EFFECTIVE COMMUNICATION

In managing, the CEO needs to effectively communicate its goals and objectives. The manager has to
orchestrate various business segments, or units, to harmoniously produce and deliver excellent
service to customers and other interested parties in the business.

THE BUDGETARY SYSTEM…. AN EXCELLENT MODEL!

PROCESS OF BUDGETING
THE SALES BUDGET

What is “Sales Forecasting”?

Sales forecasting is the process of estimating future revenue by predicting how much of a product or
service will sell in the next week, month, quarter, or year. At its simplest, a sales forecast is a projected
measure of how a market will respond to a company's go-to-market efforts.

Sales indicate meeting customers’ wants, demands, needs and desires. It fundamentally drives the
creation of business activities. It is the initiating motive of business organizations and the genesis of
normal business planning.

SALES FORECASTING DEALS WITH TRENDS IN BUSINESS ENVIRONMENT

FACTORS INFLUENCING SALES FORECAST

 Past sales volume

 General economic and industry conditions
 Relationship of sales to economic indicators
 Relative product profitability
 Market research studies
 Advertising and other promotions
 Quality of sales force
 Seasonal Variations
 Production capacity
 Long-run sales trend for various products

FACTORS INFLUENCING SALES FORECAST

In forecasting sales, factors that have strong correlation with sales pattern are identified and used.
Basically, there are three ways of making estimates for the sales budgets:

a. Apply statistical forecasting based on analysis of general business conditions, market

conditions, product growth curves. Etc.

b. Make an internal estimate by collecting the opinions of executives and sales staff.

c. Analyze the various factors that affect sales revenue and then predict the future behavior of
each of these factors.

WORKING SAMPLES: Estimated Sales in Units and Pesos

The management of New Corporation is considering a three state economic conditions: strong, fair,
and weak. Based on some macro studies, it has been forecasted that the economy in the coming year
may be 40% strong, 50% fair, and 10% weak. The projected number of units are 120,000 units, 90,000
units and 50,000 units for strong, fair and weak economic conditions respectively. The budgeted unit
sales price given the estimates in units sold is P120. Five percent (5%) of the gross sales are estimated
to be uncollectibles.

REQUIRED:

1. Budgeted units to be sold for the coming year

2. Budgeted amount of sales, net of doubtful accounts.
SOLUTION:
1. The budgeted sales in units shall be determined as follows:

2. The budgeted net sales in pesos shall be:

THE PRODUCTION BUDGET

Budgeted Production is based on budgeted sales and inventory policies. An inventory policy is
normally based on the number of units to be sold in the following period. The formula for the
budgeted production could be derived from the traditional method of determining the number of
units sold which states that finished goods inventory-beginning plus production less finished goods
inventory-ending equal budgeted sales.

PRO-FORMA BUDGETED PRODUCTION

BP= BS + FGE - FGB

BP sets the basis for DM, DL and FOH

THE DIRECT MATERIALS BUDGET

The raw materials budget is based on budgeted production. There are two (2) materials budgets to
be estimated; (1) Budgeted direct materials and (2) Budgeted direct materials purchases.

BUDGETED DIRECT MATERIALS USED

Multiply the budgeted production by the standard material per unit of finished goods and you get the
budgeted direct materials to be used, or the budgeted direct materials requirements.

This makes the standard costing system a “sine qua non” in the budgetary process.

BUDGETED DIRECT MATERIALS PURCHASES

Direct material purchases is direct materials used add the materials inventory ending, then deduct the
materials inventory beginning.
PRO-FORMA BUDGETED DIRECT MATERIALS USED AND PURCHASES

THE DIRECT LABOR BUDGET

(Assuming the company has a labor-intensive operation where workers are paid by the hour.)

On this premise, the budgeted direct labor hours is budgeted production times the standard direct
labor hour per unit produced. The standard direct labor rate per hour is multiplied to budgeted
direct labor hours to get the budgeted direct labor costs.

The standard direct labor hours per unit and the standard rate per hour are to be provided by the
standard cost sheet.

PRO-FORMA BUDGETED DIRECT LABOR

The budgeted direct labor hours would determine the number of production personnel needed to
be employed for a given budgetary period.

THE FACTORY OVERHEAD BUDGET

The factory overhead should be budgeted separately for the fixed overhead and the variable
overhead components.
Fixed overhead is constant in total while the standard fixed overhead rate is computed based on the
normal capacity.

BUDGETED FACTORY OVERHEAD COMPUTATIONS

The standard hours per unit and standard overhead rates per hour are to be based on the standard
cost sheet developed by the business.
WORKING SAMPLES:

The data pertains Charmaine Corporation. Headings are deleted and must be included in the formal
budget reports. (LY=Last year; CY= Current year; NY= Next year; NY2= Next year 2)

Charmaine Corporation made the following projections on its sales in the coming year, 20NY:

SOLUTIONS AND DISCUSSION:

The projected sales in units are computed by considering the probability of occurrence.

Schedule 1. Budgeted Sales

Schedule 2. Budgeted collections from customers

BUDGETED PRODUCTION, MATERIALS PURCHASES, AND PAYMENTS TO SUPPLIERS

Charmaine Corporation has the budgeted units sales of its product in 20CY up to the first quarter of
20NY as follows:

The company has a policy of maintaining finished goods inventory equal to 20% of the next quarter’s
sales and materials inventory of 30% of current quarter’s requirements. It takes 3 lbs. of materials AX-
23 ot produce unit of product. The materials inventory at the start of the year was recorded at 75,000
pounds.

Material AX-23 costs P1.20 per pound to purchase. The terms of the purchase is 2/30, n/45. The
company pays 55% of its purchases in the quarter of purchase and avail of the 2% trade discount. The
remaining balance is paid in the following quarter. The A/P at Dec 31, 20CY are valued at 81,000.

Required: For the year 20NY:

1. Schedule 3. Budgeted production per quarter and in total.

2. Schedule 4. Budgeted materials purchases per quarter and in total
3. Budgeted payments to merchandise suppliers.

SOLUTIONS AND DISCUSSIONS:

BUDGETED DIRECT LABOR AND FACTORY OVERHEAD

Charmaine Corporation pays its production personnel at a rate of P20 per direct labor hour. It takes
0.25 standard hours to complete a finished unit. The corporation pays its labor costs in the month
the payroll is recorded.

The standard variable overhead rate is P5 per direct labor hour and the standard fixed overhead rate
is P4 per direct labor hour. The company’s normal capacity is 75,000 units or 18,750 direct labor
hours. 30% of the total fixed overhead is non-cash. Overhead costs are paid 90% in the quarter the
overhead is incurred and the remainder is paid in the month following the quarter of incurrence. The
overhead costs incurred in the fourth quarter of 20CY were P84,000 and P70,000 fixed.

The budgeted production in units for 20NY are estimated at: Q1 64,000 units; Q2, 78,000 units; Q3,
74,000 units and Q4, 87,000 units.

REQUIRED: For the year 20NY:

1. Schedule 6: Budgeted labor cost per quarter and in tota;

2. Schedule 7: Budgeted factory overhead in quarter and in total

SOLUTIONS AND DISCUSSIONS: