Budgetary Planning and Control G.

Ong

BUDGETARY PLANNING & CONTROL

(A Synopsis)

One of the most important and useful tools for management to make plans is the budget. Budget is a
detailed, written plan that is expressed in quantitative term, this shows the plans that the firm expects to follow
during the period in order to attain its profit goals; it involves planning for future activities based on anticipated
incomes and expenses. Primarily budgets are presented in monetary terms, although some budgets are expressed
in units of output, number of employees, units of time or other non-monetary quantities.

Types of Budgets
1. Operating Budget – shows the operations planned for the forthcoming period;
2. Administrative Budget – shows the planned expenditures for the budget period; and
3. Capital Budget – shows the planned changes in fixed assets.

Planning

Operating Budget Administrative Budget Capital Budget

Sales Production Administrative Staff Projects

Revenue Materials Gen. Management R&D

Selling Expense Direct Labor Other Expenses Other Expenses

Other Expense Factory Overhead

Other Expenses

Inventory

Human Resource
Purchases

Cash Budget

Income Statement

Balance Sheet
Budgetary Planning and Control G. Ong
A complete budgetary system calls for the preparation of a number of separate budgets which are later merged
into a composite whole called a master budget, or simple, the budget. There is no universal budget program that
will fulfill the need of every firm, but a merchandising budget will illustrate the principal types of budgets, or sub-
budgets, that make up a master budget.

The Benefits of Budgeting

The primary benefits of budgeting are:
1. It requires all levels of management to plan ahead and to formalize goals on a recurring basis.
2. It provides definite objectives for evaluating performance at each level of responsibility.
3. It creates an early warning system for potential problems so that management can make changes before
things get out of hand.
4. It facilitates the coordination of activities within the business. It does this by correlating the goals of each
segment with overall company objectives. Thus, the company can integrate production and sales promotion
with expected sales.
5. It results in greater management awareness of the entity’s overall operations and the impact on operations of
external factors, such as economic trends.
6. It motivates personnel throughout the organization to meet planned objectives.

Budget for Merchandise and Manufacturing

The different budgets comprising the master budget for a merchandising concern consist of:
1. Sales Budget – most important part of the master budget, it provides the basis for planning most of the other
parts of the budget. This budget is based on forecasts, which involves the calculation of reasonable
probabilities about the future and the assumption that the future is likely to resemble the past.
2. Purchase Budget – shows the quantity and cost of purchases of merchandise needed to meet the anticipated
sales volume. It provides a basis for planning cash requirements and credit requirements posed by purchasing
needs.
3. Operating Expense Budget – it covers all the expenses expected to be incurred during the period for
overhead or commercial activities.
4. Projected Income Statement – shows the estimated net income resulting from plans embodied in the other
budgets.
5. Cash Budget – shows the effect of all plans upon the company’s cash position and the provisions that must be
made to supplement cash during the periods when the supply of cash is low and to repay any loans which
march have to be made.
6. Projected Balance Sheet – is the final summary of all budgets and shows the probable effects of decisions and
plans on the company’s financial position.

The different budgets comprising the master budget for a manufacturing concern consist of:
1. Sales Budget – most important part of the master budget, it provides the basis for planning most of the other
parts of the budget. This budget is based on forecasts, which involves the calculation of reasonable
probabilities about the future and the assumption that the future is likely to resemble the past.
2. Production Budget – shows the quantity of goods to be produced needed to meet the anticipated sales
volume.
3. Raw Material Budget – shows the quantity of raw materials to be used to produce the anticipated production
volume.
4. Purchase Budget – shows the quantity and cost of purchases of raw materials needed to meet the anticipated
production volume. It provides a basis for planning cash requirements and credit requirements posed by
purchasing needs.
5. Direct Labor Budget – show the labor cost needed to produce the production volume.
6. Factory Overhead Budget – it covers all the expenses expected to be incurred during the period of producing
the volume required.
7. Operating Expense Budget –it covers all the expenses expected to be incurred during the period for overhead
or commercial activities.
8. Projected Income Statement – shows the estimated net income resulting from plans embodied in the other
budgets.
Budgetary Planning and Control G. Ong
9. Cash Budget – shows the effect of all plans upon the company’s cash position and the provisions that
must be made to supplement cash during the periods when the supply of cash is low and to repay any
loans which march have to be made.
10. Projected Balance Sheet – is the final summary of all budgets and shows the probable effects of decisions
and plans on the company’s financial position.

Terms to remember in budget

 Budget – a formal written statement of management’s plans for a specified future time period, expressed in
financial terms.

 Budget Committee – a group responsible for coordinating the preparation of the budget.

 Budgetary Slack – the amount by which a manager intentionally underestimates budgeted revenues or
overestimates budgeted expenses in order to make it easier to achieve budgetary goals.

 Budgeted Balance Sheet – a projection of financial position at the end of the budget period.

 Budgeted Income Statement – an estimate of the expected profitability of operations for the budget period.

 Cash Budget – a projection of anticipated cash flows. Show the inflow (cash receipt/collection) and outflow
(cash payment/disbursement) of cash.

 Direct Labor Budget – a projection of the quantity and cost of direct labor necessary to meet production
requirements.

 Direct Materials Budget – an estimate of the quantity and cost of direct materials to be purchased.

 Financial Budgets – individual budgets that focus primarily on the cash resources needed to fund expected
operations and planned capital expenditures.

 Long-range Planning – a formalized process of identifying long-term goals, selecting strategies to achieve
those goals, and developing policies and plans to implement the strategies.

 Manufacturing Overhead Budget – an estimate of expected manufacturing overhead costs for the budget
period.

 Master Budget – a set of interrelated budgets that constitutes a plan of action for a specific time period.

 Merchandise Purchase Budget – the estimated cost of goods to be purchased by a merchandiser to meet
expected sales.

 Operating Budgets – individual budgets that result in a budgeted income statement.

 Participative Budgeting – budgetary approach that starts with input from lower-level managers and works
upward so that managers at all levels participate.

 Production Budget – a projection of the units that must be produced to meet anticipated sales.

 Sales Budget – an estimate of expected sales revenue for the budget period.

 Sales Forecast – the projection of potential sales for the industry and the company’s expected share of such
sales.

 Selling and Administrative Expense Budget – projection of anticipated selling and administrative expenses
for the budget period.
Budgetary Planning and Control G. Ong

Illustrative Problem: (Merchandising)

ABC Company has the following data in preparing their master budget for the first quarter of 2019:
A. Issuance of ordinary stocks amounted to P175,000.00, and equipment worth P150,000.00 were purchased
upon the start of the business.

B. Forecasted sales are as follows:

January (estimated) 40,000 units April (estimated) 80,000 units
February (estimated) 60,000 units May (estimated) 70,000 units
March (estimated) 50,000 units June (estimated) 50,000 units

C. Cash sales comprises of 50% of total sales and the 35% is collected the month following the month of sales
and 10% is collected 2nd month following the month of sales. 5% is deemed to be uncollectible.

D. It is the company policy to maintain an inventory level 20% equal to the sales quantity of the following
month.

E. Purchase invoice cost is P6.00 per unit and are paid as follows: 40% during the month of purchase and 60%
the following month.

F. Selling price per unit is P12.00 and this price is not expected to change during the year.

G. Operating expenses for the month are as follows:

Rent P 6,000.00 Salaries P 7,500.00
Insurance 200.00 Office Supplies 5,000.00
Utilities 1,200.00 Sales Commission 10% of sales
Depreciation 1,500.00 Miscellaneous 2,000.00

H. Income tax is 25%

Budgetary Planning and Control G. Ong

Sales Budget January February March April

Estimated units to be sold 40,000 60,000 50,000 80,000

Estimated revenue @P12.00 480,000.00 720,000.00 600,000.00 960,000.00

Purchase Budget January February March April

Estimated units to be sold 40,000 60,000 50,000 80,000
Desired Inventory 12,000 10,000 16,000 14,000
Total Estimated purchase 52,000 70,000 66,000 94,000
Remaining Inventory - (12,000) (10,000) (16,000)
Required units to be purchased 52,000 58,000 56,000 78,000

Total Estimated purchases, cost P6.00 312,000.00 348,000.00 336,000.00 468,000.00

Operating Expense Budget January February March April

Rent 6,000.00 6,000.00 6,000.00 6,000.00
Insurance 200.00 200.00 200.00 200.00
Utilities 1,200.00 1,200.00 1,200.00 1,200.00
Salaries 7,500.00 7,500.00 7,500.00 7,500.00
Office Supplies 5,000.00 5,000.00 5,000.00 5,000.00
Sales Commission 48,000.00 72,000.00 60,000.00 96,000.00
Miscellaneous 2,000.00 2,000.00 2,000.00 2,000.00
Bad Debt Expense 24,000.00 36,000.00 30,000.00 48,000.00
Depreciation 1,500.00 1,500.00 1,500.00 1,500.00
Total Expenses 95,400.00 131,400.00 113,400.00 167,400.00

January February March April

Cash Expenses 69,900.00 93,900.00 81,900.00 117,900.00
Non-Cash Expense 25,500.00 37,500.00 31,500.00 49,500.00
Total Expense 95,400.00 131,400.00 113,400.00 167,400.00
Budgetary Planning and Control G. Ong

Cash Budget January February March April

Cash Receipts / Collections

Initial / Additional Investment 175,000.00 - - -
Loans from creditor - - - -
Cash Sales for the month (50%) 240,000.00 360,000.00 300,000.00 480,000.00
1st month after the sale (35%) - 168,000.00 252,000.00 210,000.00
2nd month after the sale (10%) - - 48,000.00 72,000.00
Total Estimated Cash Receipt 415,000.00 528,000.00 600,000.00 762,000.00

Cash Disbursements / Payments

Equipment Purchased 150,000.00 - - -
Payment of loan - - - -
Cash Purchases (40%) 124,800.00 139,200.00 134,400.00 187,200.00
1st month after the purchase (60%) - 187,200.00 208,800.00 201,600.00
Estimated Cash Expense 69,900.00 93,900.00 81,900.00 117,900.00
Income Tax - 36,150.00 57,150.00 46,650.00
Total Estimated Cash Payment 344,700.00 456,450.00 482,250.00 553,350.00

Project Net Cash Increase (Decrease) 70,300.00 71,550.00 117,750.00 208,650.00

Cash, Beginning - 70,300.00 141,850.00 259,600.00

Cash, Ending 70,300.00 141,850.00 259,600.00 440,260.00

Budgetary Planning and Control G. Ong

Projected Income Statement

Month January February March

Sales 480,000.00 720,000.00 600,000.00
Cost of Sales (Schedule 1) 240,000.00 360,000.00 300,000.00

Gross Profit 240,000.00 360,000.00 300,000.00

Operating Expenses 95,400.00 131,400.00 113,400.00

Net Income before Tax 144,600.00 228,600.00 186,600.00

Provision for Income Tax 36,150.00 57,150.00 46,650.00

Net Income After Tax 108,450.00 171,450.00 139,950.00

Schedule 1:
Projected Cost of Sales
Month January February March

Beginning Inventory 0.00 72,000.00 60,000.00

Purchases 312,000.00 348,000.00 336,000.00

Total Goods Available for Sale 312,000.00 420,000.00 396,000.00

Ending Inventory 72,000.00 60,000.00 96,000.00

Cost of Sales 240,000.00 360,000.00 300,000.00

Budgetary Planning and Control G. Ong

PROJECTED BALANCE SHEET

Month January February March

Current Assets
Cash 70,300.00 141,850.00 259,600.00
Accounts Receivable (net) 216,000.00 372,000.00 342,000.00
Inventory 72,000.00 60,000.00 96,000.00

Total Current Assets 358,300.00 573,850.00 697,600.00

Fixed Assets 148,500.00 147,000.00 145,500.00

TOTAL ASSETS 506,800.00 720,850.00 843,100.00

Liabilities & Owners' Equity

Liabilities
Accounts Payable 187,200.00 208,800.00 201,600.00
Income Tax Payable 36,150.00 57,150.00 46,650.00
Total Liabilities 223,350.00 265,950.00 248,250.00

Ordinary Stocks 175,000.00 175,000.00 175,000.00

Retained Earnings 108,450.00 279,900.00 419,850.00
Total Owners' Equity 283,450.00 454,900.00 594,850.00

TOTAL LIABILITIES &

OWNERS' EQUITY 506,800.00 720,850.00 843,100.00