2. MARIBEL P. VALE
T-1
HIWACLOY E/S
JENNY RICKSHA
M. BUENO
T-1
CAMAGONG E/S
CATHERINE ARGARIN
GROUP MEMBERS:
DR.ELMER V.TENA
Professor
3. LEARNING OBJECTIVES
AFTER STUDYING THIS CHAPTER,
YOU SHOULD BE ABLE TO:
•UNDERSTAND THE RELATIONSHIP
BETWEEN FINANCIAL PLANNING AND
CONTROL.
•KNOW THE NATURE, PURPOSES AND
LIMITATIONS OF THE BUDGET.
•ENUMERATE THE TYPES OF BUDGETS.
•UNDERSTAND AND APPLY THE STEPS IN
DEVELOPING A MASTER BUDGET.
4. FORECASTING SHORT-TERM (OPERATING)
FINANCIAL REQUIREMENTS
• FINANCIAL PLANNING AND CONTROL PROCESS
Business is becoming
increasingly competitive and corporate
profitability is increasingly dependent upon
operating efficiency. This situation is desirable
from a social standpoint, for consumers are
getting higher quality goods at lower prices
intense competition does make life tough on
corporate managers.
MARIBEL P. VALE
PRIVATE SCHOOL TEACHER
5. Financial planning involves making projections of
sales, income, and assets based on alternative production
and marketing strategies and then deciding how to meet the
forecasted financial requirements.
Financial control moves on to the implementation
phase dealing with the feedback and adjustment process
that is required;
A. TO ENSURE THAT PLANS ARE FOLLOWED
B. TO MODIFY EXISTING PLANS AND RESPONSE TO CHANGES
IN THE OPERATING ENVIRONMENT.
6. Corporate Goal or Objectives
Corporate Long-Range Plan
Long-Range Sales Forecast
Product Mix Strategy
Short-Term Sales Forecast
Total Market
Demand
Our Share of
Market
Manufacturing
Policies
Production Budget
Materials Budget
Personnel Budget
Capital
Expenditures
Budget
Financial Control
Policies
Product Budget
Branch Budget
Regional Budget
Marketing
Policies
Advertising
Budget
Selling Budget
Research and
General
Management
Policies
ResearchBudget
Executive Staff
Budget
Budgeted Financial Statements
(Cash Flows, Income Statement, Statement of
Financial Position, Statement of Stockholders’ Equity)
Figure 16-1. FINANCIAL PLANNING and CONTROL
PROCESS
7. Financial forecasting analysis begins with
projections of sales revenues and production cost. In
stand business terminology, a budget is a plan which
sets forth the projected expenditures for a certain
activity and explains where the required funds will
come from. Thus, the production budget presents a
detailed support for the forecasted sales level. Each
of the major elements of the production budget is
likely to have a sub-budget.
8. The marketing staff will also develop
selling advertising budgets. Typically, these
budgets will be set up on a monthly basis, and as
time goes by, actual figures will be compared with
projected figures for the remainder of the year
will be adjusted if it appears that the original
projections were unrealistic.
9. BUDGETING DEFINED
Budgeting is the act of preparing a budget. A
budget is a financial plan of the resources needed to carry
out tasks and meet financial goals. It is also a quantitative
expression of the goals the organization wishes to achieve
and the cost of attaining these goal. The use of budgets to
control a firm’s activities is known as budgetary control.
10. THE PURPOSES OF THE BUDGET
A budget is a description in quantitative –
usually monetary – terms of a desired future sight
results. The process is preparing the budget requires
management at all levels to focus on the future of the
business entity. The benefits that may be realized
from a budgeting program are;
11. •Defining broad objectives and goals and formulating
strategies to achieve such objectives;
•Coordinating the activities of the organization by
integrating the plans of the various parts thereby
pulling everyone in the same direction;
•Allocating resources to those parts of the
organization where they can be used most effectively;
12. •Communicating management’s approved plans
throughout the organization;
•Uncovering and preparing for potential bottleneck in
the operations before they occur.
•Motivating managers to achieve the desired results;
and
•Setting a standard or benchmark for evaluating actual
performance.
13. ADVANTAGES AND LIMITATIONS OF
BUDGETS
1.It forces planning and exposes situations in which
plans of subcomponents abre inadequate to attain
the total organization’s objectives.
2.It allows a reiterative process to bring the goals of
the organization and the subcomponents into
agreement.
14. 3. It provides a means of communicating organization
goals down through the organization and sub-unit
operational limitations up though the organization
4. It provides a basis for financial planning, sub-unit
coordination, resource acquisition, inventory policy,
scheduling and output distribution.
5. It provides a basis by which activity can be motivated,
with actual results being compared to the planned results.
15. THE LIMITATIONS OF BUDGETING ARE:
1.Budgets tend to oversimplify the real situation and
fail to allow for variation in external factors. They do
not reflect qualitative variables.
2.It is difficult to prepare a detailed budget for an
organization that has never existed or for a new
division, product, or department of an existing firm.
16. 3. There may be lack of higher and lower management
commitment because of lack of understanding of the
fundamentals of budget preparation and utilization.
4. The budget is only a representation of future plans or
a means to the goal of profitable activity and not an end
itself.
5. Budget reports usually emphasize results, not
reason.
17. TYPES OF BUDGET
A. THE OPERATING BUDGET
1. BUDGETED INCOME STATEMENT
a.SALES BUDGET
b.PRODUCTION BUDGET
•MATERIALS COST BUDGET
•DIRECT LABOR COST BUDGET
21. THE MAJOR STEPS IN DEVELOPING A MASTER BUDGET MAY BE OUTLINED AS
FOLLOWS:
1. Establish basic goals and long-range plans for the
company. These will serve as guidelines in the
preparation of budget estimates.
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of goods sold and operating
expenses.
22. 4. Determine the effect of budgeted operating results on
assets, liabilities and ownership equity accounts. The
cash budget is the largest part of this step, since
changes in many asset and liability accounts will
depend upon the cash flow forecast.
5. Summarize the estimated data in the form of a
projected income statement for the budget period and
the projected statement of financial position as of the
end of the budget period.
24. ADDITIONAL INFORMATION:
THE TREASURER’S OFFICE ALSO
PROVIDED THE FOLLOWING INFORMATION AND
ESTIMATES:
1. All sales are on account and collection from
customers are expected to amount to
P5,185,000.
2. Equipment costing p300,000 with
accumulated depreciation of p275,000 will be
sold at its net book value. New equipment
costing P320,000 will be purchased during the
year.
25. 3. Accounts payable will increase by p15,000 and assumed to be
for materials purchases only.
4. Income taxes will be provided at an average rate of 35% of
income before taxes while P252,000 will be paid during the year.
5. Dividends amounting to P140,000 will be paid during the year
and the current portion of the long-term debt shall also be
settled at the end of the year. Interest rate is 8% per annum.
26. SALES BUDGET
The sales budget showing what products will be
sold in what quantities at what prices, is the foundation
on which all other short-term budgets are built. The
sales budget triggers a chain reaction that leads to the
development of many other budget figures in an
organization.
27. THE SALES FORECAST IS MADE AFTER
CONSIDERATION OF THE FOLLOWING FACTORS:
1. PAST SALES VOLUME
2. GENERAL ECONOMIC AND INDUSTRY CONDITIONS
3. RELATIONSHIP OF SALES TO ECONOMIC
INDICATORS
4. RELATIVE PRODUCT PROFITABILITY
28. 5. MARKET RESEARCH STUDIES AND COMPETITION
6. PRICING ADVERTISING AND OTHER PROMOTION
POLICIES
7. PRODUCTION CAPACITY
8. QUALITY OF SALES FORCE
9. SEASONAL VARIATIONS
10. LONG-TERM SALES TRENDS FOR VARIOUS PRODUCTS
29. FOR GILBERT COMPANY, THE SALES BUDGET
IS PRESENTED AS FOLLOWS:
SCHEDULE 1
SALES BUDGET FOR 2015
Unit
Price Per
Unit
Total Sales
Revenue
Estimated Sales 6,400 800 P5,120,000
30. PRODUCTION BUDGET
After the sales budget has been set, a decision
can be made on the level of production that will be needed
for the period to support sales and the production budget
can be set as well. The production budget becomes a key
factor in the determination of other budgets, the direct
labor budget and the manufacturing overhead budget.
These budgets in turn are needed to assist in formulating a
cash budget.
31. SCHEDULE 2
PRODUCTION BUDGET
FOR 2015
Units to be sold 6,400
Add: Desired ending inventory
Total
Less: Beginning inventory
Units to be produced
1,000
7,400
900
6,500
33. Add: Desired ending
inventory 1,300 4,600
Total Units required
Less: Beginning Inventory
20,800
2,200
37,100
4,000
Units to be Purchased 18,600
x P10
P186,000
33,100
x P30
P993,000
Materials
R S
Units required for production
R (6,500 x 3) 19,500
S (6,500 x 5) 32,500
34. DIRECT LABOR BUDGET
The preliminary data show that the
budgeted direct labor cost per unit produced in
P146. This must have been arrived at after
considering such factors as skills level of the
workers, labor rate per hour, time requirement,
conditions of union contracts, etc.
35. SCHEDULE 4
Number of units to be produced 6,500
Multiply by: Direct labor cost per unit
Total budgeted direct labor costs
P146
P949,000
36. OVERHEAD
COSTS
BUDGET It can be
defined as the budget which is
prepared to show all the future
costs that are expected to be
incurred during the
manufacturing of the goods
/services of the company.
37. SCHEDULE 5
BUDGETED MANUFACTURING OVERHEAD
FOR 2015
Variable overhead: units needed to produce 6,500 units
Indirect materials and supplies(@P5.85)
Materials handling (@P9.07)
Other indirect labor (@P5.07)
Total
P38,000
59,000
33,000
P 130,000
39. BUDGETED COST OF SALES
THE BUDGETED COST OF SALES STATEMENT CAN NOW BE
DEVELOPED USING THE DATA FROM THE FOLLOWING:
PRODUCTION BUDGET SCHEDULE 2
RAW MATERIALS BUDGET SCHEDULE 3
DIRECT LABOR BUDGET SCHEDULE 4
OVERHEAD COST BUDGET SCHEDULE 5
BUDGET STATEMENT OF COST OF SALES SCHEDULE 6
40. SCHEDULE 6
BUDGETED STATEMENT OF COST OF SALES
FOR 2015
Beginning work in process inventory P -____
Manufacturing costs
Direct Materials
Beginning inventory
[(2,200 R @P10)+(4,000 S @ P30)] P 142,000
41. Purchases (Schedule 3)
TOTAL
Less: Ending inventory
[(1,300R @ P10)+(4,000 S @ P30)]
Total direct materials cost
Direct labor (6,500 @P146)
Manufacturing overhead (Schedule 5)
Total manufacturing cost
Less: Ending work in process inventory
Cost of goods manufactured
1,279,000
P1,321,000
151,000
P 1,170,000
949,000
1,131,000
P 3,250,000
-____
P 3,250,000
43. SCHEDULE 7
BUDGETED MARKETING AND ADMINISTRATIVE COST
FOR 2015
Variable marketing cost
Sales commission
Others
Total
P 260,000
104,000
P 364,000
44. Fixed marketing cost
Sales salaries
Advertising
Others
Total
Total Marketing Cost
P 100,000
193,000
78,000
P 371, 000
P 735, 000
45. Administrative cost
Administrative salaries
Data Processing Salaries
Legal and other prof. fees
Depreciation
Taxes
Others
Total
Total Marketing & Administrative Cost
P 254,000
103,000
180,000
94, 000
108, 000
26,000
P 765,000
P1,500,000
46. CASH RECEIPT
A cash receipt is a proof of purchase
issued when the buyer has paid in cash. This cash
receipt form is perfect for any industry and can be
provided as proof of payment, or payment
received.
48. SCHEDULE 8
GILBERT MANUFACTURING COMPANY CASH BUDGET
FOR THE BUDGET YEAR ENDING DEC. 31,2015
Cash Balance: January 1, 2014 P 150,000
Add: Estimated receipts
Collections from customers
Sale of assets
Total
Total Cash available
P5,185,000
25,000
P5,210,000
P5,360,000
49. Less: Estimated disbursements
Payments for materials
Direct labor
Manufacturing overhead
Marketing & Administrative exp.
Payments for income tax
Dividends
Reduction in long-term debt
Acquisition of new assets
Total disbursements
Cash balance, Dec.31
P1,164,000
949,000
851,000
1,458, 000
252, 000
140,000
83,000
320,000
P 5,217,000
P 143,000
50. BUDGETED INCOME STATEMENT
The information needed to prepare the
budgeted income statement comes from the
previously provided preliminary data as well
as from the company’s other budgets.
51. SCHEDULE 9
GILBERT MANUFACTURING COMPANY BUDGETED INCOME STATEMENT
FOR THE BUDGET YEAR ENDING DEC. 31,2015
Sales (Schedule 1) P 5,120,000
Less: Cost of Sales (Schedule 6)
Gross Profit
Less: Marketing &Administrative Cost
(Schedule 7)
3,200,000
P1,920,000
1,500,000
52. Net Operating Profit P 420,000
Less: Interest expense
Net Income before Taxes
Less:Provision for Income taxes (35%)
Net Income after taxes
52,000
P368,000
128,000
P240,000
53. BUDGETED STATEMENT OF FINANCIAL
POSITION
The budgeted statement of financial position is
developed by beginning with the current statement
of financial position and adjusting it for the data
contained in the other budgets. Gilbert company’s
budgeted statement of financial position is
presented below:
54. SCHEDULE 10
GILBERT MANUFACTURING COMPANY BUDGETED STATEMENT OF
FINANCIAL POSITIONS
DECEMBER 31,2015
ASSETS
Current Asset
Cash (Schedule 8)
Account receivable
Inventories
Other current assets
Total Currents Assets
P143,000
P155,000
651,000
23,000
P 972,000
55. Long-term Asset
Property, plant & equipment
Less: Accumulated depreciation
Net
Total Assets
P2,495,000
949,000
P1,546,000
P2,518,000
56. EQUITIES
Current Liabilities
Accounts Payable
Tax payable
Current Portion of Long-term debt
Total current liabilities
Long-term liabilities
Total liabilities
Equity
Share Capital
Retained Earnings
Total Equities
P155,000
32,000
____-____
P187,000
576,000
P 763,000
P350,000
1,405,000
P2,518,000
