OPERATING BUDGET
Reporting Presented by Group 4
College Of Business Administration (CBA)
University Of the Visayas (UV) Cebu City
ACC12 TTH 9:00 – 10:30
MEMBERS:
Capero, Allan JR.
Cusares, Jasper Dale
Fermano, Roveller Kate
Cabanag, Mary Pritzy Mae
Jabonerro, Shane
Professor: Ronald M. Patiño, CPA, MBA
Operating Budget
Introduction:
Operating Budget
Operational budgets are not the same as capital budgets. Capital budgets
estimate the capital needed to complete a project, such as acquiring real estate
or new equipment, or repairs that are unanticipated or extraordinary. Operating
budgets provide reasonably good estimates concerning the volume and sources
associated with:
✓ Accounting procedures are typically used to identify, quantify, evaluate, and
report a firm's financial information. These may include:
◼ Budgeting
◼ financial statements, and
◼ operation plans and forecasts
Of all of these, the most important tool is the budget. Budgets are used to
strategically plan future business goals, as well as the financing that will be
needed to achieve them.
✓ Operating budgets facilitate planning of anticipated income and expenses
for a specified budget period.
✓ Operating budgets take into account seasonal differences.
A. Constructing and Using Budgets
The annual budget is a short-term budget based on estimated income and
expenses. It is generally defined according to budget classification code (typical
for government operations), functional and sub-functional categories, and cost
accounts. The Annual Budget report provides:
✓ estimated total values of resources necessary for optimum operation
performance (including reimbursable work / services), and
✓ estimated workload (total work units identified by cost accounts)
BUDGET CLASSIFICATION CODE SYSTEMS
Many corporate, and most organization accounting departments, have some
form of budget classification coding system, which generally determines the way
the budget is recorded, presented, and reported. Budget classification code
systems are widely used within government organizations in particular.
Effective systems classify revenues and expenditures according to
administrative, economic, and functional classifications. Administrative and
economic classification (codes) and their revenues/expenditures are distinct and
independent of each other.
The budget classification is a decision-making, as well as an accountability, tool.
It classifies expenditures and revenues, which are important for
✓ overall performance analysis
✓ efficient and uniform resource allocation, and
✓ daily budget administration the primary elements of a budget classification
system are intended to show:
1. a comprehensive overview of all operations for a given period (a
consolidated report of all operations)
2. overview and breakdown of individual department, divisions, sector, etc.
operations' revenues and expenditures (ensuring efficient allocation of
resources), and
3. consistency between components of the budget (ensuring current
expenditures and past investment maintenance are included in the budget)
CREATING AN OPERATING BUDGET
The operating budget discloses all of the firm's operational costs. This includes:
✓ materials costs
✓ labor costs
✓ equipment and machinery costs
✓ transportation and storage costs
✓ utilities, and
✓ administration, salaries, and supervision
Continued optimal operation and production depends on knowing the product's,
item's, or service's cost. The operating budget focuses daily activity revenues
and expenses, such as:
✓ Sales (of the product or service)
✓ Production (of the product or service), and
✓ Support (general office and management)
Activities outside the daily operation routine must be planned for accordingly.
However, they are not included in the operation budget.
THE BUDGET (AND SUB-BUDGET CATEGORIES)
Operational budgets are typically created during the start-up phase of the
business. As the business grows, which is usually fairly quickly in the first
months, the operational budget may be expanded.
The Operational Budget should not be adjusted in the first months of the
business, even though there may not be sustainable income while products or
services are being manufactured, constructed, or offered, and expenditures and
expenses for materials and equipment show a negative balance on the books.
As income increases, the budget will balance, and eventually it will need to be
expanded to include the additional income. The Operating Budget is
composed of a number of smaller budgets:
Sales Budget - the expected product sales and the anticipated selling price per unit (during
the budget period).
✓ Production Budget - the required number of units that must be produced to
meet the expected sales.
✓ Direct Materials Budget - the materials required to meet production
expectations.
✓ Direct Labor Budget - the labor required to meet production expectations.
✓ Manufacturing Overhead Budget – production facility expenses (during the
budget period).
✓ General and Administrative Budget – expenses required to run the corporate
office (during the budget period).
✓ Cash Budget - cash receipts and cash disbursements (during the budget
period). Also determines the firm's cash flows (during the budget period).
SALES BUDGET
The all-inclusive Operational Budget begins with the Sales Budget. And many
other budgets are based on the Sales Budget's data. The Sales Budget includes
the projected quantity of units to be sold, or service(s) to be offered, and the
asking price per unit. Sales budgets are prepared quarterly with a
comprehensive annual sales report. Monthly sales budgets are often prepared to
track sales and compare them to expected sales projections.
SALES BUDGET = Expected Sales in Units x $ Sales Price
PRODUCTION BUDGET
The Production Budget must be prepared before the Direct Materials Budget,
Direct Labor Budget, and Manufacturing Overhead Budget can be completed.
The Production Budget indicates the total quantity of widgets (units) that must
be produced. To effectively budget for annual production, the budget preparer
must know:
1. the projected quantity of units that must be sold
2. the end-of-period level of inventory, and
3. the quantity of widgets (if any) in the inventory at the
beginning of the year the same information is required for
quarterly budgets.
PRODUCTION BUDGET (NEEDS) = Budgeted Sales + Desired End Inventory in
Units or
Dollars
DIRECT MATERIALS BUDGET
The Direct Materials Budget determines the (unit) quantity of raw materials
anticipated for purchase to be used in product production. The quantity used is
based on the number of units to be produced, taken from the Production Budget.
The required level of end-of period raw materials inventory, and the beginning
inventory quantity of units, are also figures taken from the Production Budget.
The budgeted amount needed for the purchase of raw materials is quantitatively
determined by multiplying the quantity of units to be purchased by the cost per
unit.
DIRECT MATERIALS = Units of Raw Materials x Cost Per Unit
All budgeted raw material components used in production operations should be
determined by repeating the above process.
DIRECT LABOR BUDGET
The Direct Labor Budget shows the total direct labor hours calculated using
the cost of the direct labor (number of units produced multiplied by how many
hours spent to produce them), multiplied by the cost per labor hour.
TOTAL DIRECT LABOR = (Units x Direct Labor Hours) x Cost Per Labor Hour
MANUFACTURING OVERHEAD BUDGET
The Manufacturing Overhead Budget indicates the expected fixed and
variable overhead costs for the budget reporting period. Fixed and variable costs
are separated.
Costs should be analyzed according to cost behavior. A predetermined overhead
rate is typically applied. All overhead costs involving cash disbursements are
paid in the quarter incurred.
Depreciation is a non-cash charge and, if included in manufacturing overhead,
should be deducted from the total when computing expected cash payments.
SELLING EXPENSES BUDGET
The Selling Expenses Budget includes the variable and fixed selling expenses for
the budget reporting period. Fixed and variable costs are separated. The
variable expenses are typically based on sales dollars, such as those for sales
commissions and delivery expense. Fixed selling expenses include sales salaries.
GENERAL AND ADMINISTRATION EXPENSES BUDGET
The General and Administrative Expenses Budget indicates the expected
fixed and variable overhead costs for the budget reporting period. Fixed and
variable costs are separated for the general and administrative areas of the firm.
Salaries, rent expense, and office supplies are examples of fixed expenses.
Company info
ABC Manufacturing. Inc.
Budget Period
Quarter ended March 31, 2021
January, February, and March 2021
2021 forecasted sales:
Units
November prior year 280
December Prior year 310
January 200
February 250
March 300
April 320
May 330
Selling Price Info:
The company sells X for $500 each.
Collections:
The company generally collects
o 70% of sales revenue in the month of the sale.
o 20% in the month following the sale, and the remaining
o 10% in the second month following the sale.
ABC Manufacturing Inc
Sales Budget
Quarter ended march 31, 2021
January February March Total
Budgeted 200 250 300 750
sales
Budgeted 500 500 500 500
selling price
Budgeted 100,000 125,000 150,000 375,000
sales
November
Sales = 280 X 500 = 140, 000
Collections:
November 140, 000 X 70% = $98,000
December 140,000 X 20% = $28, 000
January 140, 000 X 10% = $14, 000
ABC Manufacturing INC
Cash Collection Budget
Quarter Ended March 31, 2021
January February March Total
November $14,000 14,000
sales
140, 000 X
10%
December 31 000 31,000
sales
155, 000 X
20%
December 15,500 15,500
sales
155, 000 X
10%
January sales 70 000 70,000
100, 000 X
70%
January sales 20 000 20,000
100, 000 X
20%
January sales 10,000 10,000
100, 000 X
10%
February 87,500 87,500
sales
125, 000 X
70%
February 25,000 25,000
sales
125, 000 X
20%
March Sales 105,000 105,000
150, 000 X
10%
TOTAL $115,000 $123,000 $140,000 $378,000
Finished Goods Inventory Info:
At the beginning of January, the company plans to have 40 units of Product X on hand.
They hope to maintain an ending inventory equal to 20% of following month’s sales.
Direct Materials Info:
IT takes 100 pounds of High-Density Polyethylene (HDP) to make each unit.
The budget cost for the HDP is $2.00 per pound.
Budgeted beginning direct materials inventory for January is 2,100 pounds.
The company expects to maintain ending HDP inventories at 10% of the material
needed for the following month’s production.
Direct Labor Info:
It takes 10 direct labor hours to make each unit of Product X.
The direct labor rate is $15 per hour.
Keep in mind that the first quarter is January, February, and March. November and
December from the prior year and April and May from the current year are only provided
to help compute various amounts for the quarter’s budget.
Prepare the following budgets for 2021:
Sales budget
Cash collections budget
Production budget
Direct materials budget
Direct labor budget
Budget Preparation Example Problem
Date Unit sales
January 200
February 250
March 300
April 320
May 330
(F.G) Finish Goods inventory Direct material Info:
Beginning unit = 40 100 pounds
Ending unit = 20% $2.00 per lb
Beginning Inventory = 2,100
Production Budget
Needs January Februar March Total April May
y
Budget sales 200 250 300 750 320 330
units
Budget ending 50 60 64 64 66
sales
Total Needs 250 310 364 814 386
Less Beginning (40) (50) (60) 40 (64)
F.G INV.
Budget 210 260 304 774 322
productions
Direct Material Purchased Budget
Direct Material January February March Total Apr
Needs:
Budget Production 210 260 304 774 322
Direct Material 100 100 100 100 100
Direct Material $21,000 26,000 30,400 77,400 32,200
Required for
Production
Budgeted Ending 2,600 3,040 3,220 3,220
Direct Materials
Inventory
Budgeted Direct 23,600 29,040 33,620 80,620
Material Needed
Less beginning (2,100) (2,600) (3,040) (2,100)
Direct Material
Inventory
Budgeted Direct 21,500 26,440 30,580 78,520
Material Inventory
Budgeted Cost Per 2 2 2 2.00
Pound
Budgeted Direct $43,000 $52,880 $61,160 $157,040
Material Purchases
Direct Labor Budget
Date Unit Sales:
January 200
February 250
March 300
Direct Labor Budget Info:
10 Direct Labor Hours Per Unit
$15 Per Direct Labor Hour
Direct Labor Budget
January February March Total
Budgeted Production 210 260 304 770 unit
Direct Labor Hour Per 10 10 10 10
Unit
Budgeted Direct Labor 2,100 2,600 3,040 7,740
hours
Budgeted Direct Labor $15 $15 $15 $15
Rate
Budgeted Direct Labor $31,500 $39,000 $45,600 $116,100
Cost
