CHAPTER 6

SHORT-TERM
BUDGETING
GROUP 1
Aranas, Mikkaella
Buco, Kemberly
Delusa, Jenne Vee
Luzano, MhariaLou
Mijos, Amelia
Sumaylo, Hannah
Tutor, Francis

1
PRE TEST

Budgeting is
a. the process of creating a formal plan and translating goals into a
quantitative format.
b. a technique for comparing actual costs with standard costs.
c. a technique for determining the cost of manufactured products.
d. a means of product costing that emphasize activities as basic cost
objects.

SHORT-TERM BUDGETING | 2
PRE TEST

A B C D

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PRE TEST

A B C D

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PRE TEST

The master budget

a. shows a comparison of forecasted and actual results.
b. is composed of the operating and financial budgets.
c. reflects only those costs controllable by the individual mnager.
d. is the budget of the master of the firm.

SHORT-TERM BUDGETING | 5
PRE TEST

A B C D

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PRE TEST

A B C D

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PRE TEST

The following are parts of the operating budget, except

a. sales budget.
b. materials cost budget.
c. capital budget.
d. production budget.

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PRE TEST

A B C D

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PRE TEST

A B C D

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PRE TEST

The following are parts of the financial budget, except

a. cash budget.
b. budgeted financial statements.
c. cost of sales budget.
d. capital acquisition budget.

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PRE TEST

A B C D

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PRE TEST

A B C D

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PRE TEST

Ernie Trading Co. budgeted merchandise purchases of 40,000 units next

month. The expected beginning inventory is 12,000 units and the desired
inventory at the end of next month is 15,000 units. Budgeted sales in units
for next month is
a. 37,000.
b. 43,000.
c. 55,000.
d. 52,000.

SHORT-TERM BUDGETING | 14
PRE TEST

A B C D

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PRE TEST

A B C D

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LEARNING
OUTCOMES
LEARNING OUTCOMES

1. Prepare a master budget and its supporting schedule;

2. Understand the functions and compositions of the budget

committee;

3. Diagram the relationship between the operating and financial

budget.

SHORT-TERM BUDGETING | 18
INTRODUCTION
INTRODUCTION

Companies considered budgeting as one of the most important

functions of the management. It is the process of stating in
quantitative terms the company’s budgeting, we are using a budget
that is a detailed plan expressed in quantitative terms operations
usually in units and in pesos and planning the organization
activities in a period of time.
Budget is used for six distinct purposes:
1. Planning
2. Control
3. Communication
4. Motivation
5. Standards
6. Organizing and Directing
SHORT-TERM BUDGETING | 20
INTRODUCTION

MASTER BUDGET
A master budget is regarded as a comprehensive financial
planning tool that highlights operating budgets budgeted financial
statements, and a financial plan.
a. Operating Budget – a budget plan dedicated to the
operations of the entity such as sales, production, and
operating expenses.
b. Financial Budget – a budget plan dedicated to the entity’s
cash budget, budgeted financial statements, and capital
acquisitions.

SHORT-TERM BUDGETING | 21
INTRODUCTION

OPERATING BUDGET
a) Sales budget
b) Production budget
c) Purchases budget
d) Direct labor budget
e) Overhead budget
f) Cost of sales budget
g) Operating expenses budget

SHORT-TERM BUDGETING | 22
INTRODUCTION

FINANCIAL BUDGET
a) Cash budget
b) Capital acquisitions budge
c) Budgeted financial statements
o Balance sheet
o Income statement
o Cash flows
o Retained earnings

SHORT-TERM BUDGETING | 23
SALES BUDGET
SALES BUDGET

Illustration
• C. Alvarez Manufacturing is preparing budgets for the
quarter ending June 30.
• Budgeted sales for the next five months are:
April – 20,000 units
May – 50,000 units
June – 30,000 units
July – 25,000 units
August – 15,000 units
• The selling price is P10 per unit

SHORT-TERM BUDGETING | 25
SALES BUDGET

Quarter
April May June
End
Budgeted sales in units 20,000 50,000 30,000 100,000
Multiply: unit sales
P 10 P 10 P 10 P 10
price
Budgeted sales in P
P 200,000 P 500,000 P 300,000
pesos 1,000,000
• All sales are on account
• C. Alvarez’ collection pattern is:
• 70% collected in the month of sale
• 25% collected in the following sale
• 5% uncollectible.
• The march 31 accounts receivable balance of P30,000 will
be collected in full.

SHORT-TERM BUDGETING | 26
SALES BUDGET
Quarter
April May June
End
Budgeted sales in
20,000 50,000 30,000 100,000
units
Multiply: unit sales
P 10 P 10 P 10 P 10
price
Schedule of Cash Collections on Sales

Budgeted sales in April May June Quarter EndP

P 200,000 P 500,000 P 300,000
pesos
From Accounts Receivable, March
P 30,000
1,000,000
P 30,000
31
On April Sales
70% x P 200,000 140,000 140,000
25% x P 200,000 P 50,000 50,000
On May Sales
70% x P 500,000 350,000 350,000
25% x P 500,000 P 125,000 125,000
On June Sales
70% x P 300,000 210,000 210,000
Total cash collections P 170,000 P 400,000 P 335,000 P 905,000
SHORT-TERM BUDGETING | 27
PRODUCTION
BUDGET
PRODUCTION BUDGET

• The management of C. Alvarez Manaufacturing wants ending

inventory to be equal to 20% of the following month’s budgeted
sales in units.
• On March 31, 4,000 units were on hand.
Pro-Forma Budgeted Production
Projected Sales xxx
Add: Finished goods inventory – end xxx
Total goods available for sale xxx
Less: Finished goods inventory – beg xxx
Budgeted Production xxx

SHORT-TERM BUDGETING | 29
PRODUCTION BUDGET

Quarter
April May June July
End
Budgeted sales in units 20,000 50,000 30,000 100,000 25,000
Add: Finished goods inventory – end 10,000 6,000 5,000 5,000 3,000
Total goods available for sale 30,000 56,000 35,000 105,000 28,000
Less: Finished goods inventory –
beg
4,000 10,000 6,000 4,000 5,000

Budgeted Production 26,000 46,000 29,000 101,000 23,000

SHORT-TERM BUDGETING | 30
 DIRECT
MATERIALS
BUDGET
DIRECT MATERIALS BUDGET

• At C. Alvarez Manufaturing, five pounds of material are required

per unit of product.
• Management wants materials on hand at the end of each month
equal to 10% of the following month’s production.
• On March 31, 13,000 pounds of material are on hand.
• Material cost is P 0.40 per pound.

SHORT-TERM BUDGETING | 32
DIRECT MATERIALS BUDGET

Pro-Forma Budgeted Direct Materials Used and Purchases

Budgeted direct materials used

Budgeted production xxx

Multiply by: Standard materials per unit xxx xxx

Add: Materials inventory – end xxx

Total materials for use xxx

Less: Materials inventory – beg xxx

Budgeted direct materials purchased in units xxx

Multiply: Materials cost per unit xxx

Budgeted materials purchases in pesos xxx

SHORT-TERM BUDGETING | 33
DIRECT MATERIALS BUDGET
April May June Quarter End July
Budgeted sales in units 20,000 50,000 30,000 100,000 25,000
Add: Finished goods inventory – end 10,000 6,000 5,000 5,000 3,000
Total goods available for sale 30,000 56,000 35,000 105,000 28,000
Less: Finished goods inventory – beg 4,000 10,000 6,000 4,000 5,000
Budgeted Production 26,000 46,000 29,000 101,000 23,000

Quarter
April May June July
End
Budgeted production 26,000 46,000 29,000 101,000 23,000
Multiply by: Standard materials per unit 5 5 5 5 5
115,00
Budgeted direct materials used 130,000 230,000 145,000 505,000
0
Add: Materials inventory – end 23,000 14,500 11,500 11,500
Total materials for use 153,000 244,500 156,500 516,500
Less: Materials inventory – beg 13,000 23,000 14,500 13,000
Budgeted direct materials purchased in 140,00
221,500 142,000 503,500
units 0
Multiply: Materials cost per unit 0.40 0.40 0.40 0.40
SHORT-TERM BUDGETING | 34
Budgeted materials purchases in
56,000 88,600 56,800 201,400
pesos
DIRECT MATERIALS BUDGET

• C. Alvarez pays P 0.40 per pound for its materials.

• One-half of a month’s purchases is paid for in the month of
purchase; the other half is paid in the following month.
• The March 31 accounts payable balance is P 12,000.

SHORT-TERM BUDGETING | 35
DIRECT MATERIALS BUDGET

Quarter
April May June
End
Budgeted materials purchases in pesos 56,000 88,600 56,800 201,400
Schedule of Cash Disbursements on Material Purchases
Quarter
April May June
End
From Accounts Payable, March 31 P 12,000 P 12,000
On April material purchases:
50% x P 56,000 28,000 28,000
50% x P 56,000 P 28,000 28,000
On May Sales
50% x P 88,600 44,300 44,300
50% x P 88,600 P 44,300 44,300
On June Sales
50% x P 56,800 28,400 28,400
Total cash disbursements for material P
P 40,000 P 72,300 P 185,000
purchases 72,700
SHORT-TERM BUDGETING | 36
DIRECT LABOR
BUDGET
DIRECT LABOR BUDGET

• At C. Alvarez, each unit of product requires 0.05 hours (3 minutes)

of direct labor.
• Assume that C. Alvarez has no layoff policy, workers are paid at
the rate of P 10 per hour regardless of the hours worked.
• For the next three months, the direct labor workforce will be paid
for a minimum of 1,500 hours per month
Pro-Forma Budgeted Direct Labor

Budgeted direct labor hours

Budgeted production xxx

Multiply by: Standard direct labor hour per unit xxx xxx

Multiply: DL Rate per hour xxx

Budgeted direct labor cost xxx

SHORT-TERM BUDGETING | 38
DIRECT LABOR BUDGET

April May June Quarter End

Budgeted production 26,000 46,000 29,000 101,000
Multiply by: Standard direct labor hour per
0.05 0.05 0.05 0.05
unit
Budgeted direct labor hours 1,300 2,300 1,450 5,050
Compare with: Labor hours guaranteed
1,500 1,500 1,500
paid
Direct labor hours for payment 1,500 2,300 1,500 5,300
Multiply: DL Rate per hour P 10 P 10 P 10 P 10
Budgeted direct labor cost P 15,000 P 23,000 P 15,000 P 53,000

SHORT-TERM BUDGETING | 39
 FACTORY
OVERHEAD
BUDGET
FACTORY OVERHEAD BUDGET

• At C. Alvarez, manufacturing overhead is applied to units of

product on the basis of direct labor hours.
• The variable manufacturing overhead rate is P 20 per direct labor
hour.
• Fixed manufacturing overhead is P 50,00 per month, which
includes P20,000
Budgeted Factory of noncash
Overhead costs (primarily depreciation of plant
Computations
assets).
Budgeted variable overhead
Budgeted production xxx
Multiply by: Standard variable overhead per unit xxx xxx
Budgeted fixed overhead
Normal capacity xxx
Multiply by: Standard fixed overhead per unit xxx xxx
Budgeted total overhead xxx
SHORT-TERM BUDGETING | 41
FACTORY OVERHEAD BUDGET

April May June Quarter End

Budgeted direct labor hours 1,300 2,300 1,450 5,050

Multiply: Variable FOH per unit P 20 P 20 P 20 P 20

Variable manufacturing overhead
P 26,000 P 46,000 P 29,000 P 101,000
cost
Add: Fixed FOH cost 50,000 50,000 50,000 150,000
Total manufacturing overhead
P 76,000 P 96,000 P 79,000 P 251,000
cost

Total manufacturing overhead cost P 76,000 P 96,000 P 79,000 P 251,000

Less: Noncash manufacturing
20,000 20,000 20,000 60,000
overhead
Total cash disbursements for
P 56,000 P 76,000 P 59,000 P 191,000
overhead

Overhead application rate P 251,000 / 5,050 hours P 49.70

SHORT-TERM BUDGETING | 42
 COST OF
GOODS SOLD
BUDGET
COST OF GOODS SOLD BUDGET

April May June Quarter End

Materials:
April: 20,000 x 5 lbs. x P 0.40 P 40,000
May: 50,000 x 5 lbs. x P 0.40 P 100,000
June: 30,000 x 5 lbs. x P 0.40 P 60,000 P200,000
Labor:
April: 20,000 x 0.05 hrs. x P
10,000
10
May: 50,000 x 0.05 hrs. x P
25,000
10
June: 30,000 x 0.05 hrs. x P
15,000 50,000
10
Overhead:
April: 20,000 x P 2.49 49,800
May: 50,000 x P 2.49 124,500
June: 30,000 x P 2.49 74,700 249,000
SHORT-TERM BUDGETING | 44
Total Cost of Goods Sold P 99,800 P 249,500 P 149,700 P 499,000
 SELLING AND
ADMINISTRATIV
E EXPENSE
BUDGET
SELLING AND ADMINISTRATIVE EXPENSE BUDGET

• At C. Alvarez, the selling and administrative expense budget is

divided into variable and fixed components.
• The variable selling and administrative expenses are P 0.50 per
unit sold.
• Fixed selling and administrative expenses are P 70,000 per month.
• The fixed selling and administrative expenses include P 10,000 in
costs – primarily depreciation - that are not cash outflows of the
current month

SHORT-TERM BUDGETING | 46
SELLING AND ADMINISTRATIVE EXPENSE BUDGET

Quarter
April May June
End
Budgeted sales in units 20,000 50,000 30,000 100,000
Multiply by: Variable selling and admin.
P 0.50 P 0.50 P 0.50 P 0.50
rate
Variable selling and administrative
P 10,000 P 25,000 P 15,000 P 50,000
expenses
Add: Fixed selling and admin. expenses 70,000 70,000 70,000 210,000
Total selling and administrative P
P 80,000 P 95,000 P 260,000
expenses 85,000

Total selling and administrative expenses P 80,000 P 95,000 P 85,000 P 260,000

Less: Noncash selling and admin.
10,000 10,000 10,000 30,000
expenses
Total cash disbursements for S&A P
P 70,000 SHORT-TERM
P 75,000 BUDGETING | 47
P 230,000
expenses 85,000
 BUDGETED
STATEMENT OF
CASH FLOWS
BUDGETED STATEMENT OF CASH FLOWS

Cash report presentation models:

1. Cash budget model

2. Economic cash flow model

3. Accounting statement of cash flow model

SHORT-TERM BUDGETING | 49
BUDGETED STATEMENT OF CASH FLOWS

Model 1. The Cash Budget Model

Cash balance – beg P xxx

Add: Cash receipts (operating and xxx
investing)
Total cash for use xxx
Less: Cash payments (operating and xxx
investing)
Cash balance before financing xxx
Financing inflows (outflows) xxx
Cash balance - end P xxx

SHORT-TERM BUDGETING | 50
BUDGETED STATEMENT OF CASH FLOWS

Model 2. The Economic Cash Flow Model

Cash inflows P xxx

Less: Cash outflows xxx
Net cash inflows (outflows) xxx
Add: Cash balance - beginning xxx
Cash balance - end P xxx

SHORT-TERM BUDGETING | 51
BUDGETED STATEMENT OF CASH FLOWS

Model 3. The Statement of Cash Flow Model

Cash from operating activities

Cash inflows from operating activities xxx
Cash outflows from operating activities xxx p xxx
Cash from investing activities
Cash inflows from investing activities xxx
Cash outflows from investing activities xxx xxx
Cash from financing activities
Cash inflows from financing activities xxx
Cash outflows from financing activities xxx xxx
Net change in cash and cash equivalents p xxx

SHORT-TERM BUDGETING | 52
CASH BUDGET

Assume the following information for C. Alvarez:

• Annual interest rate for all borrowings is 16%.
• Maintains a minimum cash balance of P 30,000.
• Borrows on the first day of the month and repays loans on the last
day of the month.
• Pays a cash dividend of P 49,000 in April.
• Purchases P 143,700 of equipment in May and P 48,300 in June (both
purchases paid in cash)
• Has an April 1 cash balance of P 40,000.

SHORT-TERM BUDGETING | 53
CASH BUDGET
April May June Quarter End
Beginning cash balance P 40,000 P 30,000 P 30,000 P 40,000
Add: cash collections made 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less: cash disbursements on
Materials 40,000 72,300 72,700 185,000
Direct labor 15,000 23,000 15,000 53,000
Manufacturing overhead 56,000 76,000 59,000 191,000
Selling and administrative expense 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total cash disbursements 230,000 400,000 270,000 900,000
Excess cash (deficiency in cash) 20,000 30,000 95,000 45,000
Financing need (payments needed)
Borrowing 50,000 - - 50,000
Repayments - - 50,000 50,000
Interest - - 2,000 2,000
Total financing needed (payments needed 50,000 - 52,000 2,000
Ending cash balance P 30,000 P 30,000 P 43,000 P 43,000

SHORT-TERM BUDGETING | 54
BUDGETED
INCOME
STATEMENT
BUDGETED INCOME STATEMENT

April May June Quarter

End
Sales P 200,000 P 500,000 P P
300,000 1,000,000
Less: Cost of Goods Sold 99,800 249,500 149,700 499,000
Gross Profit 100,200 250,500 150,300 501,000
Less: Selling and Administrative 80,000 95,000 85,000 260,000
Expenses
Operating Income 20,200 155,500 65,300 241,000
Less: Interest Expense - - 2,000 2,000
Quarter
Net Income April May
P 20,200 June
P P End
P 239,000
155,500 63,300
Budgeted sales in units 20,000 50,000 30,000 100,000
Multiply: unit sales
P 10 P 10 P 10 P 10
price
Budgeted sales in P
P 200,000 P 500,000 P 300,000
pesos 1,000,000
SHORT-TERM BUDGETING | 56
BUDGETED INCOME STATEMENT
April May June Quarter
End
Sales P 200,000 P 500,000 P P
300,000 1,000,000
Less: Cost of Goods Sold 99,800 249,500 149,700 499,000
Gross Profit 100,200 250,500 150,300 501,000
Less: Selling and Administrative 80,000 95,000 85,000 260,000
Expenses
Operating Income 20,200 155,500 65,300 241,000
Less: Interest Expense April May
- June
-
Quarter End
2,000 2,000
Materials:
NetApril:
Income20,000 x 5 lbs. x P 0.40 P 40,000 P 20,200 P P P 239,000
May: 50,000 x 5 lbs. x P 0.40 P 100,000 155,500 63,300
June: 30,000 x 5 lbs. x P 0.40 P 60,000 P200,000
Labor:
April: 20,000 x 0.05 hrs. x P 10 10,000
May: 50,000 x 0.05 hrs. x P 10 25,000
June: 30,000 x 0.05 hrs. x P 10 15,000 50,000
Overhead:
April: 20,000 x P 2.49 49,800
May: 50,000 x P 2.49 124,500 SHORT-TERM BUDGETING | 57
June: 30,000 x P 2.49 74,700 249,000
Total Cost of Goods Sold P 99,800 P 249,500 P 149,700 P 499,000
BUDGETED INCOME STATEMENT

April May June Quarter

End
Sales P 200,000 P 500,000 P P
300,000 1,000,000
Less: Cost of Goods Sold 99,800 249,500 149,700 499,000
Gross Profit 100,200 250,500 150,300 501,000
Less: Selling and Administrative 80,000 95,000 85,000 260,000
Expenses
Operating Income 20,200 155,500 65,300 241,000
Less: Interest Expense April - May - 2,000
June 2,000
Quarter End
Net Income
Budgeted sales in units P 20,000
20,200 P
50,000 P
30,000 P 239,000
100,000
Multiply by: Variable selling and admin. 155,500 63,300
P 0.50 P 0.50 P 0.50 P 0.50
rate
Variable selling and administrative
P 10,000 P 25,000 P 15,000 P 50,000
expenses
Add: Fixed selling and admin. expenses 70,000 70,000 70,000 210,000
Total selling and administrative P
P 80,000 P 95,000 SHORT-TERM P 260,000
expenses 85,000 BUDGETING | 58
BUDGETED INCOME STATEMENT

April May June Quarter

End
Sales P 200,000 P 500,000 P P
300,000 1,000,000
Less: Cost of Goods Sold 99,800 249,500 149,700 499,000
Gross Profit 100,200 250,500 150,300 501,000
Less: Selling and Administrative 80,000 95,000 85,000 260,000
Expenses
Operating Income 20,200 155,500 65,300 241,000
Less: Interest Expense - - 2,000 2,000
Net Income P 20,200 P P P 239,000
155,500 63,300

SHORT-TERM BUDGETING | 59
 BUDGETED
STATEMENT OF
RETAINED
EARNINGS
BUDGETED STATEMENT OF RETAINED EARNINGS

April May June Quarter End

Retained Earning, beginning P 146,150 P P 272,850 P 146,150
117,350
Add: Net income 20,200 155,500 63,300 239,000
Less: Dividends declared and paid 49,000 - - 49,000
Retained Earnings, ending P P P 336,150 P 336,150
117,350 272,850

SHORT-TERM BUDGETING | 61
 BUDGETED
SCHEDULE OF
ACCOUNTS
RECEIVABLE
BUDGETED SCHEDULE OF ACCOUNTS RECEIVABLE

April May June Quarter

End
Accounts Receivable, beginning P 30,000 P 50,000 P P 30,000
125,000
Add: Credit Sales 200,000 500,000 300,000 1,000,000
Less: Collections on accounts receivable 170,00 400,000 335,000 905,000
Accounts Receivable, ending 60,000 150,000 90,000 125,000
Less: Bad debts 10,000 25,000 15,000 50,000
Net realizable value of accounts P 50,000 P P P 75,000
receivable 125,000 75,000

SHORT-TERM BUDGETING | 63
 BUDGETED
SCHEDULE OF
RAW
MATERIALS
BUDGETED SCHEDULE OF RAW MATERIALS

April May June Quarter

End
Desired materials ending inventory 23,000 14,500 11,500 P 11,500
Multiply: Material cost per unit P 0.40 P 0.40 P 0.40 P 0.40
Raw materials inventory P 9,200 P 5,800 P 4,600 P 4,600

SHORT-TERM BUDGETING | 65
 BUDGETED
SCHEDULE OF
FINISHED
GOODS
BUDGETED SCHEDULE OF FINISHED GOODS

April May June Quarter

End
Desired ending inventory 10,000 6,000 5,000 P 5,000
Multiply: Unit cost P 4.99 (P 2 + P 0.5 + P P 4.99 P 4.99 P 4.99 P 4.99
2.49)
Finished Goods Inventory P 49,900 P P P 24,950
29,940 24,950

SHORT-TERM BUDGETING | 67
 BUDGETED
SCHEDULE OF
ACCOUNTS
PAYABLE
BUDGETED SCHEDULE OF ACCOUNTS PAYABLE

April May June Quarter

End
Accounts Payable, beginning P 12,000 P 28,000 P 44,300 P 12,000
Add: Credit Purchases 56,000 88,600 56,800 201,400
Less: Payments made 40,000 72,300 72,700 185,000
Accounts Payable, ending P 28,000 P P 28,400
44,300 28,400

SHORT-TERM BUDGETING | 69
 BUDGETED
STATEMENT OF
FINANCIAL
POSITION
BUDGETED STATEMENT OF FINANCIAL POSITION

ABC reported the following account balances prior to preparing its

budgeted financial statements:
• Land – P 50,000
• Common stock – P 200,000
• Retained earnings – P 146,150 (April 1)
• Equipment – P 175,000

SHORT-TERM BUDGETING | 71
BUDGETED STATEMENT OF FINANCIAL POSITION

2nd QUARTER
ASSETS
Cash P 43,000
Accounts Receivable 75,000
Raw Materials Inventory 4,600
Finished Goods Inventory 24,950
Land 50,000
Equipment 367,000
Total assets 564,550

LIABILITIES AND EQUITY

Accounts Payable 28,400
Common Stock 200,000
Retained Earnings 336,150
Total liabilities and equity 564,550
SHORT-TERM BUDGETING | 72
REFERENCE:

• https://www.youtube.com/watch?v=zsa26WRUtk4

SHORT-TERM BUDGETING | 73
THANK
YOU!