Big Picture B, ULO B

ACC 222- Financial Management

Department of Accounting Education

UM Tagum College
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb.Prepare a master budget and its

components.

Metalanguage
For you to demonstrate ULOc, you will need to have an operational understanding
of the following terms below. Please note that you will also be required to refer to
the previous definitions found in ULOb section.
1. Financial Control. It deals with the feedback and adjustment process that is
required to ensure that plans are followed and to modify existing plans in
response to the changes in the operating environment.

2. Budgeting. It is the act of preparing budget.

3. Budget. Is a financial plan of the resources needed to carry out tasks and
meet financial goals. It is also a description in quantitative, usually monetary,
terms of a desired future results.

4. Budgetary control. The use of budget to control a firm’s activities.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first 3 weeks of
the course, you need to fully understand the following essential knowledge laid
down in the succeeding pages. Please note that you are not limited to exclusively
refer to these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc., and even online tutorial websites.
1. Purpose of Budget
1. Defining broad objectives and goals and formulating strategies to achieve
such objectives.
2. Coordinating the activities of the organization by integrating the plans of the
various parts thereby pulling everyone in the same direction.
3. Allocating resources to those parts of the organization where they can be
used most effectively.
4. Communicating management’s approved plans throughout the organization.
5. Uncovering and preparing for potential bottleneck in the operations before
they occur.
6. Motivating managers to achieve the desired results.
7. Setting a standard or benchmark for evaluating actual performance.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

1. Advantages and Limitations of budgeting

Advantages:
1. It forces planning and exposes situations in which plans of subcomponents
are inadequate to attain the total organization’s objectives.
2. It allows a reiterative process to bring the goals of the organization and the
subcomponents.
3. It provides a means of communicating organization goals down through the
organization and sub-unit operational limitations up through 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 monitored, with actual results
being compared to the planned results.

Limitations:
1. Budgets tend to oversimplify the real situation and fail to allow for variations
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.
3. There may be lack of higher and lower management commitment because of
lack of understanding of the fundamentals 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. It may interfere with the supervisor’s
style of leadership and can therefore stifle initiative.
5. Budget reports usually emphasize results, not reasons.

2. Types of Budget
A. Operating Budget
1. Budgeted Income statement
a. Sales Budget
b. Production Budget
 Materials cost budget
 Direct labor cost budget
 Factory OH budget
 Inventory levels
2. Cost of Sales Budget
3. Selling and administrative expense budget
4. Financial Expense Budget
B. Financial Budget
1. Budgeted Statement of Financial Position
2. Cash Budget

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

3. Budgeted Statements of Sources and Use of Funds

C. Capital Budget/Investment Budget

4. Steps in Developing a Master Budget

1. Establish basic goals and long-range plans for the company.
2. Prepare sales forecast
3. Estimate the COGS and Operating Expenses
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 budget period.

Figure 2 depicts the sequence and types of budgets commonly found.

Sales Budget

Ending Inventory Budget Production Budget S & A Expense Budget

Cash Budget

Budgeted Income Budgeted Statement of

Statement Financial Position

Figure 2. The Master Budget Interrelationship

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Illustrative Problem: Master Budget Preparation

Gilbert Manufacturing Company manufactures a special line of tools. As of
December 31, 2019, the Statement of Financial Position of the firm as follows:

Gilbert Company
Statement of Financial Position
December 31, 2019

Assets Equities
Current Assets Current Liabilities
Cash P150,000 Account Payable P140,000
Accounts Receivable 220,000 Taxes Payable 156,000
Inventories 592,000 Current Portion of long-term debt 83,000
Other current assets 23,000
Total Current Assets 985,000 Total current liabilities 379,000
Long- term assets Long term Liabilities 576,000
PPE 2,475,000 Total Liabilities 955,000
Less: Acc. Depreciation 850,000 Equity share Capital P350,000
Net 1,625,000 Retained Earnings 1,305,000
Total 1,655,000
Total Assets P2,610,000 Total Liabilities and Equity P2,610,000

The following information is available for the development of its Master Budget for
2020:

Estimated Sales:
Units 6400
Price per unit P800
Finished Goods Inventory
Beginning 900 units @ P500
Ending 1,000
Work in Process Inventory
None
Raw Materials
Material
R S
Materials required per unit of finished product 3 units 5 units
Beginning Inventory 2,200 4,000
Ending Inventory 1,300 4,600
Unit Cost P10 P30
Direct Labor P146 per unit produced

Overhead is estimated as follows:

Variable:
Indirect materials and supplies P5.85 per unit produced
Material handling 9.07 per unit
Other indirect labor 5.07 per unit

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Fixed:
Supervisor Labor P175,000
Maintenance and Repair 85,000
Plant administration 173,000
Utilities 87,000
Depreciation 280,000
Insurance 43,000
Property taxes 117,000
Other 41,000
Marketing and Administrative Expense are budgeted as follows:
Variable Marketing Costs:
Sales Commission P40.625 per unit sold
Other marketing costs P16.250 per unit sold
Fixed Marketing Costs:
Sales Salaries P100,000
Advertising 193,000
Other 78,000
Administrative Costs (all fixed):
Administrative Salaries P254,000
Data processing services 103,000
Legal and other professional fees 180,000
Depreciation – Building,
Furniture and Equipment 94,000
Taxes – Other than income tax 160,000
Other 26,000

Additional information:
The treasurer’s office also provided the following information and estimates:
1. All sales are on account and collections 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.
3. Accounts payable will increase by P15,000 and assumed to be for material
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 debts shall also be settled at the end of the year.
Interest rate is 8% per annum.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Required:
Prepare the Master Budget for Gilbert Company for the year ending December 31,
2020.
Based on the above preliminary data, each of Gilbert Company’s budget will now be
discussed and illustrated.
Sales Budget
Sales budget show what products will be sold in what quantities and at what prices.
It is the foundation on which all other short-term budgets are built. The sales forecast
can 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
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

Sales Budget is presented below:

Schedule 1
Sales Budget
For 2020
Units Price per unit Total Sales Revenue
Estimated Sales 6,400 800 P5,120,000

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. Production budget becomes a key factor in the
determination of other budgets, including the direct materials budget, the direct labor
budget and the manufacturing overhead budget.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Schedule 2
Production Budget
For 2020
Units to be sold 6,400
Add: Desired ending Inventory 1,000
Total 7,400
Less: Beginning Inventory 900
Units to be produced 6,500

Raw Materials Budget

After determining the number of units to be produced, the Raw Materials Purchases
can now be prepared, as follows:
Schedule 3
Raw Materials Purchases
For 2020
Materials
R S
Units required for production
R (6,500 x 3) 19,500
S (6,500 x 5) 32,500
Add: Desired ending inventory 1,300 4,600
Total units required 20,800 37,100
Less: Beginning Inventory 2,200 4,000
Units to be purchased 18,600 33,100
Unit price 10 30
TOTAL Purchases P186,000 P993,000

Direct Labor Budget

The preliminary data show that the budgeted direct labor cost per unit produced is
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.

Schedule 4
Number of units to be produced 6,500
X DL cost per unit P146
Total Budgeted Direct Labor Cost P949,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Overhead Budget
Study of past records will show the cost reacts to changes in volume or in relation to
other factors. Some overhead items may be projected on the basis of direct labor
hours or on machine hours.
The overhead budget for 2020 is illustrated below using the basic information from
the preliminary data previously established.

Schedule 5
Budgeted Manufacturing Overhead
For 2020

Variable overhead: units needed to produce 6,500 units

Indirect materials and supplies @ 5.85 P 38,000
Materials handling @ 9.07 59,000
Other indirect labor @ 5.07 33,000
Total 130,000

Fixed Manufacturing overhead

Supervisor labor 175,000
Maintenance and repairs 85,000
Plant administration 173,000
Utilities 87,000
Depreciation 280,000
Insurance 43,000
Property Taxes 117,000
Others 41,000
Total 1,001,000
Total manufacturing overhead P1,131,000

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 Material Budget Schedule 3
Direct Labor Budget Schedule 4
Overhead Cost Budget Schedule 5
Budgeted Statement of Cost of Sales Schedule 6

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Schedule 6
Budgeted Statement Cost of Sales
For 2020
Beginning work in process inventory P -
Manufacturing Costs
Direct Materials
Beginning Inventory [(2200R@P10) + (4000S@P30)] P 142,000
Purchases (Schedule 3) 1,179,000
Total P1,321,000
Less: Beginning Inventory [(1300 R @ P10) + (4600 S @P30) 151,000
Total Direct Materials Costs P1,170,000
Direct Labor Cost (6500 @ 146) 949,000
Manufacturing Overhead (Schedule 5) 1,131,000
Total Manufacturing Cost P3,250,000
Less: Ending Work in Process Inventory -
Cost of Goods Manufactured P3,250,000
Add: Beg. Finished Goods Inventory (900 @ P500) 450,000
Total Goods Available for sale P3,700,000
Less: Ending finished Goods Inventory (1000@ P500 500,000
Cost of Sales P3,200,000

Marketing and Administrative Expense Budget

Using the previously provided data, the marketing and administrative expense
budget is as follows:
Schedule 7
Budgeted Marketing and Administrative Expense
For 2020
Variable marketing costs
Sales Commission (6400 @P40.625) P260,000
Others (6400 @P16.25) 104,000
Total P364,000
Fixed Marketing Costs
Sales Salaries
P100,000
Advertising 193,000
Others 78,000
Total 371,000
Total Marketing costs P735,000
Administrative Costs (all fixed)
Administrative Salaries P254,000
Data processing services 103,000
Legal and other professional fees 180,000
Depreciation – building, furniture and equipment 94,000
Taxes – other than income 160,000
Others 26,000
Total 765,000
Total marketing and administrative costs P1,552,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Cash Budget
Using the data collected, in various budgets and the information that has been
previously provided, the following cash budget statement is developed.
Schedule 8
Gilbert Manufacturing Company
Cash Budget
For the Budget Year Ending December 31, 2020

Cash Bal., Jan. 1, 2019 P 150,000

Add: Estimated Receipts
Collections from customers P5,185,000
Sale of Assets 25,000
Total P5,210,000
Total cash available P5,360,000
Less: Estimated Disbursement
Payment for material purchases P1,164,000
Direct Labor 949,000
Manufacturing Overhead 851,000
Marketing and administrative expenses 1,458,000
Payment for income tax 252,000
Dividends 140,000
Reduction in long –term debt 83,000
Acquisition of new assets 320,000
Total disbursements P5,217,000
Cash balance, December 31 P 143,000

Budgeted Income Statement

Schedule 9
Gilbert Manufacturing Company
Budgeted Income Statement
For the Budget Year Ending December 31, 2020

Sales (schedule 1) P5,120,000

Less: Cost of Sales (Schedule 6) 3,200,000
Gross Profit 1,920,000
Less: Marketing and Administrative costs (Schedule 7)
1,552,000
Net operating profit 368,000
Less: Interest Expense 52,000
Net income before taxes 316,000
Less: Provision for income taxes (35%) 111,000
Net Income after Taxes P 205,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Budgeted Statement of Financial Position

Schedule 10
Gilbert Manufacturing Company
Budgeted Statement of Financial Position
December 31, 2020

Assets
Current Assets
Cash (Schedule 8) P 143,000
Accounts Receivable 155,000
Inventories 651,000
Other current assets 23,000
Total Current Assets P 972,000
Long-term Assets
PPE P2,495,000
Less: Accumulated Depreciation 949,000
Net P1,546,000
Total Assets P2,518,000
Liabilities and Equity
Current Liabilities
Accounts payable P 155,000
Taxes Payable 15,000
Interest Payable 52,000
Total Current Liabilities 222,000
Long term liabilities 576,000
Total Liabilities P 798,000
Equity
Share Capital 350,000
Retained Earnings 1,370,000
Total 1,720,000
Total Liabilities and equity P2,518,000

Self-Help: You can also refer to the sources below to help you
further

*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).

Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.
*Agamata, F. T. (2012). Reviewer in management advisory services (2013 Ed.).
Manila: GIC Enterprises & Co., Inc.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Check
Questions:
1. What are the basic benefits and purposes of developing pro forma statements and
cash budget?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________.

2. What is a master budget? Briefly describe its content.

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________.

3. Discuss what is budget and budgetary control?

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________.

4. Why sales forecast the starting point in budgeting?

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________.

5. “As a practical matter, planning and control mean exactly the same thing.” Do you
agree? Explain.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Analyze
Problem I.The January 31, 2019 Statement of Financial Position of Shelpat
Corporation as follows:

Cash P 8,000
Accounts Receivable (net of allowance
for uncollectible accounts of P2,000) 38,000
Inventory 16,000
PPE, net of allowance for Accumulated
Depreciation 40,000
P102,000
Accounts Payable P82,000
Ordinary Shares 50,000
Retained Earnings (deficit) (30,500)
102,000
Additional information:
 Sales are budgeted as follows:
o February P110,000
o March 120,000
 Collections are expected to be 60% in the month of sale, 38% the next month,
and 2% uncollectible.
 The gross margin is 25% of sales. Purchases each month are 75% of the next
month’s projected sales. The purchases are paid in full the following month.
 Other expenses for each month, paid in cash, are expected to be P16,500.
Depreciation each month is P5,000.

Required:
1. What is the budgeted cash collections for February 2019?
2. What is the pro forma income (loss) before income taxes for February 2019?
3. What is the projected balance in accounts payable on February 2019?

Problem II. Reliance Company budgets sales at P2,000,000 and expects a net
income before tax of 10% of the sales.Expenses are estimated as follows:
Selling 15% of sales
Administrative 9% of sales
Finance 1% of sales

Labor is expected to be 40% of the total manufacturing cost. Factory overhead is to

be applied at 75% of direct labor cost.Inventories are to be as follows:
January 1 December 31
Materials 250,000 300,000
Work in process 200,000 320,000
Finished goods 350,000 400,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Required: Compute the following:

1. Total Manufacturing Costs.
2. Factory overhead.
3. Materials Purchases.

Problem III. Eddie’s Bar and Restaurant Supplies expects its revenues and
payments for the first part of the year to be:
Sales Payments
January P14,000 18,000
February 20,000 21,300
March 26,000 19,100
April 22,000 22,400
May 18,000 14,700

Seventy percent of the firm’s sales on credit. Past experience shows that 40% of
accounts receivable are collected in the month after sale, and the remainder are
collected in the second month after sale. Prepare a schedule of cash receipts for
March, April, and May. Eddie pays its payments in the following month. Eddie had a
cash balance of P2,000 on March 1, which is also its minimum required balance.
There is an outstanding loan of P2,000 on March 1. Prepare a cash budget for
March, April and May.

Problem IV.Silver Company makes a product that is very popular as a Mother’s Day
Gift. Thus, peak sales occur in May of each year, as shown in the company’s sales
budget for the second quarter given below.
April May June Total
Budgeted sales on accountP300,000 P500,000 P200,000 P1,000,000
From the past experience, the company has learned that 20% of a month’s sales are
collected in the month of sale, another 70% are collected in the month following sale,
and the remaining 10% are collected in the second month following sale. Bad debts
are negligible and cam be ignored. February sales totalled P230,000, and March
sales totalled P260,000.
1. Prepare a schedule of expected cash collections from sales, by month and in
total, for the second quarter.
2. Assume that the company will prepare a budgeted statement of financial
position as of June 30. Compute the accounts receivable as of that date.

In a Nutshell

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Based on the concepts on financial forecasting presented, write the three

remarkable lessons you learned.
1. __________________________________________________________

__________________________________________________________

__________________________________________________________

2. __________________________________________________________

__________________________________________________________

__________________________________________________________

3. __________________________________________________________

__________________________________________________________

__________________________________________________________

Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keyword Index

Budgeting
Budgetary Control

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