SAN PEDRO COLLEGE

12 C. Guzman Street, 8000 Davao City, Philippines

Master of Arts in Hospital Administration

Third Trimester, SY 2019-2020

ACCOUNTING & FINANCIAL MANAGEMENT

LESSON 4 – OPERATIONAL BUDGETING

FINACIAL PLANNING PROCESS

Budgeting is the process of translating a plan in quantitative terms usually monetary.

Once the major undertakings of an enterprise have been programmed, they are
restated in quantitative terms in a formal statement called the budget. A budget,
therefore, is a formal statement of a planned course of action expressed in
quantitative terms.

The objectives of budgeting are the following:

1. Planning – The financial plans of the different sub-units are prepared geared
towards the attainment of the company’s predetermined objectives. These
include the profit plan, budgeting balance sheets, capital expenditures budget,
and the cash budget so that expected results of operations and their effects on
financial resources can be visualized.

2. Coordination – Budgeting brings about harmony and synchronized operations for

the different levels of management. Heads of the different sub-units of an
organization are made aware of their common goal and their contributions to the
attainment of company objectives.

3. Control – Budgeting provides management with the yardstick in evaluation

performance. Periodic comparison between actual and budget figures is done to
ensure that operations are in accordance with plans and therefore geared
towards predetermined objectives. Variances are analyzed and the possible
causes are determined to minimize if not totally avoid them for the rest of the
year.

In planning the best uses of a firm’s resources, the different steps followed are based
on the following questions:

Where are we now?

This requires analysis of current financial statements of a company, namely, its
statement of financial position, income statement, and statement of cash flows. This
 is done to detect areas of strengths and weaknesses as indicated by the measures of
liquidity or short-term solvency, profitability and stability.

How did we get here?

This requires an interpretation of historical data which may reveal the causes of
current financial stability or difficulty such as sufficiency or insufficiency of fund
inflows from operations, inability to plough back earnings by declaring the greater
portion annual net income as dividends, and unprofitable operations of some sub-
units.

Where do we want to go?

The difference alternatives are evaluated and the best choice is made considering
the projected outcomes. This requires financial projections such as estimates of cash
flows, revenue, costs and expenses and the resulting financial ratios.

MASTER BUDGET

The consolidation of all the budgets of the different sub-units (departments,

branches and sections) in an enterprise is called the master budget. As such, it
serves as the management’s principal vehicle for coordinating the plans of the firm.
It consists of the following:

1. Operational budget or profit plan – refers to the plan of operations wherein

details of revenues and expenses are shown and takes the form of budgeted
income statement.

2. Financial resources budgets – show the effects of the profit plan on the financial
resources of the company and consist of the budgeted statement of financial
position and cash budget.

3. Capital expenditures budget – is in the form of a statement showing the planned

procurement and disposal of property, plant and equipment.

BUDGETING PROCESS

Top management formulates its overall objectives, plans and policies and
assumptions to serve as guidelines in the preparation of the budget estimates.

The preparation of budget estimates starts with sales forecasting so that sales
forecasts are considered the cornerstone in budgeting. The sales budget is then
prepared based on sales forecasts depending on the level of operations at which
management would want to operate. The planned or budgeted sales volume serves
as the basis in determining production/ purchase volume and costs and expenses
involved.
 The heads of the different responsibility centers, in consultation with their
immediate superiors, prepare their individual budgets based on the planned volume
of activities. The individual budgets are then consolidated into a tentative master
budget which may undergo revisions until an acceptable one is produced.

Top management approves the final master budget and disseminates the approved
budget to the different responsibility centers.

BUDGET SCHEDULES

1. Sales or Revenues budget – is the process of predicting future sales on a given time
period.

a. Formulas to determine planned sales:

Daily
Estimated number of customers or clients xx
Multiply by: Average quantity purchased
by a customer or client xx
Planned sales or revenues (in volume) xx

Planned sales or revenues (in volume) xx

Multiply by: Planned selling price per volume xx
Planned sales or revenues (in pesos) xx

▪ Projected monthly sales or revenues schedule:

▪ Projected annual sales or revenues schedule:

 ▪ Projected annual accounts receivable schedule:

If there are multiple collections of accounts receivable during the month, this
schedule can be prepared:

2.

3. Production Forecast – is the process of predicting future production using the

required direct materials, direct labor, and overhead on a given time period.

Formula to determine planned production:

Daily
Planned sales (in volume) xx
Add: Desired finished goods, ending balance xx
Available for sale xx
Less: Desired finished goods, beginning balance xx
Planned production (in volume) xx

a. Projected monthly production schedule:

* to be computed separately using the ‘Cost of Production Report’

b. Projected annual production schedule:

There must be consistency as to increase in production in relation to sales for

the succeeding two (2) years. Determine the annual percentage of increase in
production in order to compute the projected production (in volume and in
pesos) for Years 2 and 3.

c. Direct materials purchase requirements:

Daily
Planned raw materials usage (in volume) xx
Add: Desired raw materials, ending balance xx
Total available for use xx
Less: Desired raw materials, beginning balance xx
Planned raw materials purchases (in volume) xx

If raw materials comprise of several ingredients needed for the creation of a

product, a schedule should indicate the details:

Based on the schedule above, the average cost per volume can be derived as:

Total cost of raw materials purchases

Total planned raw materials purchases (in volume)
d. Projected monthly direct materials purchases schedule:

e. Projected annual direct materials purchases schedule:

Any increase in raw materials purchases for the succeeding two (2) years must
be consistent with the needs of annual production. Derive the annual
percentage of increase in purchases to complete the projected raw materials
purchases (in volume and in pesos) for Years 2 and 3.

f. Projected direct labor schedule:

Any plan to augment the salaries of workers on a yearly basis must be provided
in the projected annual direct labor schedule.
Formula to determine planned indirect materials usage:
Daily
Planned production (in volume) xx
Multiply by: Indirect materials usage per volume xx
Planned indirect materials usage (in volume) xx

Indirect materials may consist of different items needed for the planned
production where a schedule may be prepared:

Based on the schedule above, the average cost per volume can be derived as:

Total cost of indirect materials usage

Total planned indirect materials usage (in volume)

g. A projected monthly indirect materials usage schedule is then prepared:

h. Project changes in annual indirect materials usage for the next succeeding two
(2) years using the schedule below:
i. Projected indirect labor schedule:

Renumeration costs escalate every year so that a projected schedule is then

prepared:

j. Production Cost Report:

For service type of business, production report comprises of materials, supplies

and labor that are directly attributable in providing the service.
 A production cost per volume can be computed for the production schedule:

In case of trading business wherein an entrepreneur buys products from

manufacturers, distributors or retailers, and then sells them to ultimate consumers,
there are no direct labor and production overhead forecast. The following are
schedules are prepared:

a. Formula to determine planned purchases:

Daily
Planned sales (in volume) xx
Add: Desired merchandise inventory, end. Balance xx
Available for sale xx
Less: Desired merchandise inventory, beg. balance xx
Planned purchases (in volume) xx

b. Projected monthly purchases schedule:

c. Projected annual purchases schedule:

4. Projected Income Statement – measures the future profitability for a given period of
time.

Schedule 1: Cost of Sales/ Cost of Goods Sold

For manufacturing concern:

For trading concern:

 For service concern:

Schedule 2: Selling Expenses

Schedule 3: General & Administrative Expenses

Schedule 4: Interest Expense

 Schedule 5: Income Tax

For sole proprietorship, the income tax is based on net profit before
income tax computed using this table:

- R.A. No. 10963 (TRAIN Law)

If gross sales/ revenues do not exceed the P3,000,000 annual threshold, the taxpayer
may opt to be taxed at 8% of gross sales/ revenues in excess of P250,000.

For trading partnership and corporation, the income tax is at 30% of the net income
before income.
QUIZ – OPERATIONAL BUDGETING

Multiple Choice:

1. 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 emphasizes activities as basic cost objects.

2. Budgets are related to the following management functions, except:

a. Planning
b. Control
c. Performance evaluation
d. None of above

3. The master budget:

a. Shows a comparison of forecasted and actual results
b. Is composed of operating and financial budgets
c. Reflects only those costs controllable by the individual manager
d. Is the budget of the master of the firm

4. Following are the parts of the operating budget, except:

a. Sales budget
b. Materials cost budget
c. Capital budget
d. Production budget

5. The starting point in preparing a comprehensive budget is:

a. The cash budget
b. The budgeted income statement
c. The sales forecast
d. The production budget

6. A strategic budget
a. Is a short-range management tool
b. Describes the long-term position, goals and objectives of an organization within
its environment
c. Involves evaluating specific long-term investment decisions
d. Is a short-rage consideration related to liquidity

7. The budget elements included in the financial budget process are the following,
except the:
a. Budgeted balance sheet
b. Capital budget
c. Cash budget and budgeted statement of cash flows
d. Budget variance

8. Among the components of the operating budget is the selling and administrative
expenses budget, which:
 a. Is usually optional.
b. Is composed only of fixed costs.
c. Is difficult to allocate by month and therefore presented as a lump sum figure for
the whole year.
d. Should be detailed so that the key assumptions can be better understood.

9. One component of the financial budget is the cash budget. The cash receipts section
of the cash budget includes all sources of cash, among which is:
a. Depreciation
b. Factory supplies
c. Extinguishment of debt
d. Loan proceeds

10. Following are parts of the operating budget, except:

a. Sales budget
b. Materials cost budget
c. Capital budget
d. Production budget
CASE PROBLEMS

Case 1

Earth Co. budgeted merchandise purchases of 40,000 units next month. The
expected beginning inventory is 12,000 units and the desired ending inventory at the
next month is 15,000 units.

Required: Budgeted sales in units for next month is____________.

Case 2
Eddie Inc. will starts its commercial operations on January 1, 2019. The sales
forecast per sales manager’s estimates for its first year of operations is 50,000 units.
However, the production manager estimated that only 80% of the sales forecast can
be produced with the available workforce and equipment. The product will be sold
for P20 per unit.

Required: The budgeted sales peso for Eddie Inc’s initial year of operations
is______________.

Case 3
Ginger Company is preparing its cash budget for next year. Budgeted sales for four
months are as follows:
April P80,000 June P240,000
May 160,000 July 80,000
Fifty percent of total sales is cash sales. The balance, or the credit sales, is collected
in the following manner:
70% in the month following the sale
20% in the second month following the sale
10% in the third month following the sale

Required: How much is the budgeted cash receipts in July?_______________

Case 4
Peter Company has just prepared its master budget for the year 2019. Some of the
information used in the preparation of such budget is as follows:
a. Budgeted sales: January P480,000 April P500,000
February 520,000 May 576,000
March 560,000 June 640,000
b. Twenty percent of total sales is cash sales. The collections pattern for the sales
on credit is as follows:
30% in the month of sale
40% in the month after the month of sale
25% in the second month after the month of sale
c. Peter’s gross profit rate is 60% of sales.
d. Accounts payable arising from merchandise purchases is paid for in the month
following the purchase.
e. The company desires an inventory at the end of each month equal to 30% of the
next month’s sales in units.
f. The variable operating expenses (other than cost of goods sold) are 10% of sales
and are paid for in the month following the sale.
g. The annual fixed operating expenses are as follows:
Depreciation P336,000 Salaries P864,000
Advertising 576,000 Property taxes 192,000
Insurance 144,000
h. All of the fixed operating expenses are incurred uniformly throughout the year.
Cash fixed operating expenses are paid in the month of incurrence, except for:
- Insurance – paid quarterly in January, April and July
- Property taxes – paid twice a year in April and October

Required:
1. Budgeted cash collections in March for the sales made in March is__________.
2. Budgeted purchases of merchandise for February is___________.