BUDGETING

MANAGEMENT AND
PLANNING
Budgeting — Formalizes plans and translates
qualitative narratives into a documented,
quantitative format

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The Planning Process

Strategic
Planning
Tactical
Planning

Budget

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STRATEGIC PLANNING

• Long term (5 to 10 years)

• Top-level management
• Long-range goals, strategies, and policies
• Foundation for short-term planning
• Identify and gather information on key variables, both
internal and external

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BANK
TACTICAL PLANS

• Short term (1 to 18 months)

• Top and middle management
• Specific objectives and means to achieve strategic plans
• Basis against which results can be measured

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BUDGETS

 Communicate objectives, constraints, and expectations

 Provide financial predictions
 Provide nonfinancial performance goals and objectives
 Identify potential difficulties
 Determine resource allocation and constraints
 Permit control through budget-to-actual comparisons

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THE CONTROL PHASE
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THE CONTROL PHASE

• Actual-to-budget comparisons
• Determining and investigating variances
• Corrective action
• Feedback to operating managers

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IMAGE SLIDE

MASTER
BUDGET

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WOODGROVE
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REVENUE:
Gross Sales/ Revenue 100.00
Sales Discount/ Allowance 3.00
Net Sales/ Revenue 98.00

COST OF GOODS SOLD:

Beg Raw Materials Inventory 5.00
Add: Raw materials purchased 50.00
Less: End RM Inventory 15.00
Raw Materials Used 40.00
Less: Indirect Materials 12.00
Direct Materials Used 28.00
Add: Direct Labor
Add: Applied Factory Overhead
Total Production Cost
25.00
20.00
73.00
INCOME
STATEMENT
Add: Work in Process, beg 12.00
Less: Work in Process, end 10.00
Cost of Goods Manufactured 75.00
Add: Finished Goods, beg. 1.00
Less: Finished Goods, end. 10.00
Cost of Goods Sold 66.00

OPERATING EXPENSES:
General and administrative expenses 4.00
Selling and marketing expenses 8.00
12.00
NET INCOME BEFORE TAX 20.00
Less: Income Tax (30%) 6.00
NET INCOME AFTER TAX 14.00
 SAMPLE PROBLEM 1

Marguerite, Inc., expects to sell 20,000 pool cues for P12.00 each. Direct materials costs are P2.00, direct
manufacturing labor is P4.00, and manufacturing overhead is P0.80 per pool cue. The following inventory
levels apply to 20X4:

Beginning inventory Ending inventory

Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

On the 20X5 budgeted income statement, what amount will be reported for sales?

SALES 20,000 x P12 = P240,000

 SAMPLE PROBLEM 1

Marguerite, Inc., expects to sell 20,000 pool cues for P12.00 each. Direct materials costs are P2.00, direct
manufacturing labor is P4.00, and manufacturing overhead is P0.80 per pool cue. The following inventory
levels apply to 20X4:

Beginning inventory Ending inventory

Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

How many pool cues need to be produced in 20X5?

20 500 UNITS

Beg Finished Goods 2 000

Add: Production ? DEDUCT 2 000 FROM 22 500 = 20 500
Total Goods Available for Sale
Less: End Finished Goods (2 500)
Total Number of Goods Sold 20 000 ADD 20 000 AND 2 500 = 22 500
 SAMPLE PROBLEM 1

Marguerite, Inc., expects to sell 20,000 pool cues for P12.00 each. Direct materials costs are P2.00, direct
manufacturing labor is P4.00, and manufacturing overhead is P0.80 per pool cue. The following inventory
levels apply to 20X4:

Beginning inventory Ending inventory

Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

On the 20X5 budgeted income statement, what amount will be reported for cost of goods sold?

Total Number of Goods Sold 20 000

X Product Cost 6.80 (P4.00 + P2.00 + 0.80)

COGS = 136,000
 SAMPLE PROBLEM 1

Marguerite, Inc., expects to sell 20,000 pool cues for P12.00 each. Direct materials costs are P2.00, direct
manufacturing labor is P4.00, and manufacturing overhead is P0.80 per pool cue. The following inventory
levels apply to 20X4:

Beginning inventory Ending inventory

Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

What are the 20X5 budgeted costs for direct materials, direct manufacturing labor, and manufacturing
overhead, respectively?

DM 20,500 x P2.00 = P41,000

DL 20,500 x P4.00 = P82,000
OH 20,500 x P0.80 = P16,400
Katie Enterprises reports the year-end information from 20X4 as follows: SAMPLE PROBLEM 2
Sales (70,000 units) P560,000
Cost of goods sold 210,000

Gross margin 350,000

Operating expenses 200,000

Operating income P 150,000

Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as
a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain
constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

What is budgeted sales for 20X5?

P560,000 x 1.04 x 0.90 = P524,160

Katie Enterprises reports the year-end information from 20X4 as follows: SAMPLE PROBLEM 2
Sales (70,000 units) P560,000
Cost of goods sold 210,000

Gross margin 350,000

Operating expenses 200,000

Operating income P 150,000

Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as
a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain
constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

What is budgeted cost of goods sold for 20X5?

P210,000 x 0.90 = P189,000

Katie Enterprises reports the year-end information from 20X4 as follows: SAMPLE PROBLEM 2
Sales (70,000 units) P560,000
Cost of goods sold 210,000

Gross margin 350,000

Operating expenses 200,000

Operating income P 150,000

Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as
a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain
constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

Should Katie increase the selling price in 20X5?

Sales (70,000 units) P524,160

Cost of goods sold 189,000
Gross margin 335 160
Operating expenses 200,000
Operating income P135,160

No, because there would be a decrease in gross margin and operating income compared to 20X4.
Wallace Company provides the following data for next year: SAMPLE PROBLEM 3
Month Budgeted Sales
January P120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 40% of sales. Inventory at the end of December is P21,600 and target ending inventory
levels are 30% of next month's sales, stated at cost.

Purchases budgeted for January total:

Beginning Inventory 21 600

Purchases ? 69,840
Total Available Inventory 91 440 19 440 + 72 000
Cost of Goods Sold 72 000 120 000 x 60%
Ending Inventory 19 440 108 000 x 30% x 60%
Wallace Company provides the following data for next year: SAMPLE PROBLEM 3
Month Budgeted Sales
January P120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 40% of sales. Inventory at the end of December is P21,600 and target ending inventory
levels are 30% of next month's sales, stated at cost.

Purchases budgeted for February total:

Beginning Inventory 19 440

Purchases ? 69 120
Total Available Inventory 88 560 19 440 + 72 000
Cost of Goods Sold 64 800 108 000 x 60%
Ending Inventory 23 760 132 000 x 30% x 60%
 SAMPLE PROBLEM 4

Konrade, Inc., expects to sell 30,000 athletic uniforms for P80 each in 20X5. Direct materials costs are
P20, direct manufacturing labor is P8, and manufacturing overhead is P6 for each uniform. The following
inventory levels apply to 20X4:

Beginning inventory Ending inventory

Direct materials 12,000 units 9,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 6,000 units 5,000 units

1. How many uniforms need to be produced in 20X5? 30,000 + 5,000 – 6,000 = 29,000 uniforms
2. What is the amount budgeted for direct material purchases in 20X5?
3. What is the amount budgeted for cost of goods manufactured in 20X5?
4. What is the amount budgeted for cost of goods sold in 20X5?
REVENUE:
Gross Sales/ Revenue 30 000 x 80.00 2 400 000
Sales Discount/ Allowance -
SAMPLE PROBLEM 4
2 400 000
Net Sales/ Revenue

COST OF GOODS SOLD:

Beg Raw Materials Inventory 12 000 x 20.00 240 000
Add: Raw materials purchased 26 000 x 20.00 ?
Less: End RM Inventory 9 000 x 20.00 520180
000000
Raw Materials Used ?
Less: Indirect Materials - 1. What is the amount budgeted for direct material
purchases in 20X5?
Direct Materials Used ?
2. What is the amount budgeted for cost of goods
Add: Direct Labor manufactured in 20X5?
Add: Applied Factory Overhead 3. What is the amount budgeted for cost of goods
Total Production Cost 986 000 sold in 20X5?
Add: Work in Process, beg -
Less: Work in Process, end -
Cost of Goods Manufactured
Add: Finished Goods, beg. 6 000 x 34.00 204 000
986 000
Less: Finished Goods, end. 5000 x 34.00 170 000
Cost of Goods Sold 30 000 x 34.00

GROSS PROFIT 11 020

380 000
000