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MAS - 1.2.5 Integrated Review & Refresher in Accountancy R.D.Balocating

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MAS_1.2.

5 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY


R.D.BALOCATING
UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY

BUDGETING
 Budgeting is the process of formalizing plans and committing them to written, financial terms.
 Budgets are plans dealing with the acquisition and use of resources over a specified time period. It is a plan of action
expressed in financial terms.

Budgeting Planning Tool & Control Tool

Identify objectives. Compare actual results with budgeted (planned)


amounts.
Identify actions needed to achieve Corrective action can be taken, if needed.
objectives.

The steps involved in the planning and control process are as follows:
 Develop a strategic plan. A strategic plan identifies strategies for future activities and operations, generally
covering at least five years.
 Translate the strategic plan into long-term and short-term objectives.
 From the objectives, develop short-term plans.
 Develop budgets based upon the short-term plans.
 Compare actual results with planned (budgeted) amounts.
 Take corrective action, if necessary.
 Advantages of Budgeting
 Budgets force managers to plan.
 Budgets provide information that can be used to improve decision making.
 Budgets provide standards used for performance evaluation and control. Control involves comparing actual
results with budgeted amounts and taking corrective action whenever actual performance deviates significantly
from planned performance.
 Budgets improve communication and coordination.
 The budgeting process can help management identify and deal with potential bottlenecks or constraints before
they become major problems.
 Master Budget
 The master budget is a comprehensive financial plan consisting of various individual budgets.

Master Budget

Operating Budgets Financial Budgets

Definition: budgets concerned with income-generating budgets concerned with cash flows and
activities financial position at end of period
Examples: sales budget cash budget
production budget budgeted balance sheet
direct materials purchases budget budget for capital expenditures
direct labor budget
overhead budget
selling and administrative expenses budget
ending finished goods inventory budget
cost of goods sold budget
budgeted income statement

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R.D.BALOCATING

 The starting point in preparing a master budget is forecasting sales.


 Sales Forecasting
 Sales Staff. The sales staff, given their proximity to customers, may be in the best position to provide information
about customers’ needs.
 Market Researchers. Management may turn to market researchers to provide a check on forecasts from local
sales personnel.
 The Delphi Technique. This method is used to enhance forecasting and reduce bias in estimates. Under this
method, members of the forecasting group prepare individual forecasts and submit them anonymously. Each
member of the group receives copies and the results are discussed.
 Trend Analysis. This analysis may be helpful in preparing sales forecasts. The analysis can range from simple
visual extrapolation of points on a graph to a highly sophisticated computerized time series analysis.
 Econometric Models. Another approach is to enter past sales data into a regression model to obtain a statistical
estimate of factors affecting sales. Sophisticated analytical models are not widely available.
 Preparing the Operating Budget
 The sales forecast is the basis for the sales budget and is usually the responsibility of the marketing department.
 The sales budget is the projection of expected sales in units and pesos.
 The production budget indicates the number of units of finished product to be produced in order to meet:
 sales needs
 inventory requirements
If production is related to sales of the next period, production needs for a manufacturer can be calculated as
follows:
Budgeted sales in units
+ Desired ending inventory in units
= Total units needed
– Beginning inventory (units on hand)
= Units to be produced
 The direct materials purchases budget is a budget of the expected usage of materials in production and
the purchase of the direct materials required.
The steps involved in preparing a direct materials purchases budget are as follows:
1. Determine the amount of direct materials necessary to manufacture the number of units to be produced.
2. Determine the quantity of direct materials to be purchased as follows:
Quantity of direct materials needed for production
+ Desired ending inventory of direct materials
= Total quantity of direct materials needed
– Beginning inventory of direct materials
= Quantity of direct materials to be purchased
3. Determine the cost of the direct materials to be purchased by multiplying the quantity of direct materials
to be purchased by the expected cost per unit of direct material.
 The direct labor budget is a budget of planned expenditures for direct labor. The direct labor budget indicates
the rate per hour and the number of hours necessary to meet production requirements.
 The overhead budget shows the expected cost of all manufacturing costs other than direct materials and direct
labor. Budgeted variable overhead costs are based on a budgeted variable overhead rate multiplied by budgeted
activity. Budgeted fixed overhead costs remain unchanged as the activity level changes within the relevant range.
 The cost of goods sold budget calculates the expected costs of the goods to be sold. Budgeted cost of goods
sold is calculated as follows:
Direct materials used
+ Direct labor used
+ Overhead
= Budgeted manufacturing costs
+ Beginning finished goods
= Goods available for sale
– Ending finished goods
– Budgeted cost of goods sold
 The selling and administrative expenses budget is a budget of planned expenditures for nonmanufacturing
activities, such as sales commissions and office salaries.
 Preparing the Financial Budget
The financial budgets are:
1. the cash budget
2. the budgeted balance sheet, and
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MAS_1.2.5 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
3. the budget for capital expenditures.
 Cash Budget
The cash budget is a summary of planned cash receipts and cash payments. A cash budget might include the
following items:
Beginning cash balance
+ Cash receipts
= Cash available
– Cash payments
– Minimum cash balance
= Excess cash (or deficiency)
Investments:
– Investment of excess cash
+ Liquidation of investment of excess cash
Financing:
+ Borrowings to cover deficiency
– Repayment of loan
– Interest payments
= Ending cash balance
 Using Budgets for Performance Evaluation
Budgets are used to judge a manager’s performance (by comparing actual outcomes with planned outcomes).
Bonuses, salary increases, and promotions are often tied to budgetary performance. Clearly, budgets can have a
significant effect on the behavior of managers. Whether the effect is positive or negative depends on how budgets are
used. Hopefully, budgets will promote goal congruence and, simultaneously, create a drive in managers to achieve
the organization’s goals. Although no one has yet developed the perfect budgetary system, there are key features that
a sound budgetary system should possess.
 Static Budgets versus Flexible Budgets
A static budget is a budget for a particular level of activity, such as a sales level of 1,000 units. Static budgets
are not very useful for performance reports because the actual activity level may differ from the static budget
activity level.
Flexible budgets compute expected costs at different levels of activity. A flexible budget is used to compute
what costs should have been for the actual activity level. Flexible budgets permit management to prepare
performance reports that compare actual and budgeted costs for the actual level of activity. When preparing a
flexible budget, variable costs and fixed costs are identified and calculated for the different activity levels.
Flexible budget variance is the difference between the actual amount and the flexible budget amount for the
actual activity level.
 The Behavioral Dimension of Budgeting
Budgeting is often used to judge the actual performance of managers. Bonuses, salary increases, and promotions
are all affected by a manager’s ability to meet certain benchmarks.
An ideal budgetary system:
 promotes goal congruence (the manager’s personal goals are congruent or consistent with the organization’s
goals), and
 creates a drive in managers to achieve the goals.
Dysfunctional behavior is behavior that is in conflict with the organization’s goals. If the budget is improperly
administered, dysfunctional behavior may result.
Key features of a budgeting system that encourage positive behavior are:
 frequent feedback on performance
 monetary and nonmonetary incentives
 participative budgeting
 realistic standards
 controllability of costs
 multiple measures of performance
 Continuous budgeting is a process in which there is an ongoing 12-month budget at all points in time during a budget
period; a new budget month (12 months into the future) is added as each current month expires.
 Budget slack is the intentional underestimation of revenues and/or overestimation of expenses in a budgeting process
for the purpose of including deviations that are likely to occur so that results will occur within budget limits.
 The presence of slack in the budget allows subordinate managers to achieve their objectives with less effort than
would be necessary if there were no slack.
 Slack creates problems due to the considerable interaction of the budget factors.
 An imposed budget is a budget that top management develops with little or no input from operating personnel;
operating personnel are then informed of the budget objectives and constraints.
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MAS_1.2.5 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
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 A participatory budget is a budget that has been developed through a process of joint decision making by top
management and operating personnel.
 The Budget Manual. The budget manual is a detailed set of documents that provide information and guidelines
about the budgetary process, and should include the following:
 statements of the budgetary purpose and its desired results;
 a listing of specific budgetary activities to be performed;
 a calendar of scheduled budgetary activities;
 sample budgetary forms; and
 original, revised, and approved budgets.

MULTIPLE CHOICE:
1. The starting point in preparing a comprehensive budget is
a. the sales forecast.
b. the cash budget.
c. the budgeted income statement.
d. the flexible expense budget.

2. Budgeting expenditures by purpose is called


a. program budgeting.
b. zero-based budgeting.
c. line budgeting.
d. flexible budgeting.

3. Which of the following is a difference between a static budget and a flexible budget?
a. A flexible budget includes only variable costs, a static budget includes only fixed costs.
b. A flexible budget includes all costs, a static budget includes only fixed costs.
c. A flexible budget gives different allowances for different levels of activity; a static budget does not.
d. None of the above.

4. "Incremental budgeting" refers to


a. line-by-line approval of expenditures.
b. setting budget allowances based on prior year expenditures.
c. requiring top management approval of increases in budgets.
d. using incremental revenues and costs in budgeting.

5. When preparing the series of annual operating budgets, management usually starts the process with the:
a. cash budget. c. sales budget.
b. budgeted balance sheet. d. production budget.

6. G Company has beginning inventory of 4,000 units. Management estimates that 35,000 units will be sold during the
first quarter with a 10% increase in sales each quarter. It is the company’s policy to maintain an ending inventory
equal to 25% of the next quarter’s sales. Each unit sells for P3.00. How much sales revenue should be budgeted for
the third quarter?
a. P84,700 b. P115,050 c. P126,000 d. P127,050

7. L Company’s budget calls for the following production:

Quarter 1 45,000 units Quarter 3 34,000 units


Quarter 2 38,000 units Quarter 4 48,000 units

Each unit of product requires three pounds of direct material. The company’s policy is to begin each quarter with an
inventory of direct material equal to 30% of that quarter’s direct material production requirements. Budgeted direct
material purchases (in pounds) for the third quarter would be:
a. 114,600. b. 89,400. c. 38,200. d. 29,800.

8. The following beginning and ending inventory levels (in units) are planned for the upcoming fiscal year:

Beginning of Year End of Year


Raw material 40,000 50,000
Work-in-process 10,000 10,000
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Finished goods 80,000 50,000

Two units of raw material are needed to produce each unit of finished product. If the company plans to sell 480,000
units during the upcoming fiscal year, the number of units it would have to manufacture during the year would be:
a. 510,000 units. b. 480,000 units. c. 450,000 units. d. 440,000 units.

9. D Company is planning to sell 2,000 units and produce 2,200 units during the upcoming month. Each unit requires 2
ounces of raw material at a cost of P15.00 per ounce and one-half hour of direct labor at a rate of P12.50 per
hour. Overhead is applied at a rate of 120% of direct labor costs. The company has 2,000 ounces of raw material in
its beginning inventory and wants to have 2,400 ounces in its ending inventory. How much direct labor cost should
be budgeted for the upcoming month?
a. P27,500 b. P16,500 c. P13,750 d. P12,500

10. E Company is planning to sell 2,000 units and produce 2,200 units during the upcoming month. Each unit requires 2
ounces of raw material at a cost of P15.00 per ounce and one-half hour of direct labor at a rate of P12.50 per
hour. Overhead is applied at a rate of 120% of direct labor costs. The company has 2,000 ounces of raw material in
its beginning inventory and wants to have 2,400 ounces in its ending inventory. How much overhead cost should be
budgeted for the upcoming month?
a. P27,500 b. P16,500 c. P13,750 d. P12,500

11. The following credit sales are budgeted by J Company:

January P124,000
February 120,000
March 135,000
April 140,000
May 142,000

The company's past experience indicates that 50% of receivables are collected in the month of sale, 30% in the
month following the sale, and 20% in the second month following the sale. What amount should be budgeted as
cash receipts for March?
a. P135,000 b. P128,300 c. P67,500 d. P60,800

12. M Company budgeted direct materials purchases of P150,000 in April and P240,000 in May. It is the company’s
practice to pay for 70% of its purchases in the month of purchase and the remaining 30% in the following month.
Other costs are all paid during the month incurred. During May, the following items were budgeted:

Wages expense P75,000


Purchase of office equipment 36,000
Selling and administrative expenses 24,000
Depreciation expense 18,000

What amount should be budgeted for cash disbursements for May?


a. P366,000 b. P348,000 c. P324,000 d. P213,000

13. A continuous budget:


a. presents a statement of expectations for a period but does not present a firm commitment.
b. drops the current month or quarter and adds a future month or a future quarter as the current month or quarter is
completed.
c. presents the plan for only one level of activity and does not adjust to changes in the level of activity.
d. presents the plan for a range of activity so that the plan can be adjusted for changes in activity.

14. Budji Corp. is preparing its budget for 2015. For 2014, the following were reported:
Sales (100,000 units) P1,000,000
Cost of good sold 600,000
Gross profit P400,000
Operating expenses *240,000
Net income P160,000

*Including depreciation of P40,000


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MAS_1.2.5 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
Selling prices will increase by 10% and sales volume in units will decrease by 5%. The cost of goods sold as a percent
of sales will increase to 62%. Other than depreciation, all operating costs are variable. Budji will budget a net income
for 2015 of
a. P167,100 b. P175,500 c. P168,000 d. P176,000

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