PRINTABLE LEARNING MATERIAL
Module 3- Topic2: Budget Preparation
LEARNING OUTCOME:
Illustrate the formula and format for the preparation of budgets and projected financial
statements. (ABM_BF12-IIIc-d-11)
Defining Budget
According to Santoyo, Lim, and Patio in their book of Business Finance by MaxCor
Publishing House, a budget is an expectation of costs and income for a given activity
or event. In finance, the budget serves as a support to the financial statements
incorporated into a larger plan known as a business or operating plan.
Preparing the Budget:
1. Preparation of a sales forecast
2. Determining production volume
3. Estimating cash flow
4. Preparation of Financial Statements
Types of Budget:
1. Operating Budget- is a detailed projection of income and expenses for a given
period of time, which is usually one year. Operating Budget includes:
Sales Budget
Production Budget
Operating Budget
Income Statement
2. Financial Budget- shows the impact of the planned operations and capital
investments on a firm’s assets, liabilities, and owner’s equity. The financial
budget includes:
Cash Budget
(Lifted from: [Link]
Understanding Operating Budget
1. Sales Budget- According to Prachi M., in the article of Investor’s Book, a Sales
budget refers to the estimation of the sales revenue and the sales overheads for
a particular period. A more accurate sales forecast means better utilization of
resources, higher profitability, and less wastage. Sales forecasting, which is
nothing but an estimation of demand for goods or services in the market is
essential for preparing a sales budget.
Example:
Assumptions:
1. Two products are expected to be sold for the first three quarters of 2020.
2. Product X has a selling price of P50; Product Y at P100
The Sales Budget
MU Enterprises
January-September 2020
Quarter 1 Quarter 1 Quarter 2 Quarter 2 Quarter 3 Quarter 3 Total Total
Volume Value Volume Value Volume Value Volume Value
Product (Quantity) (in Pesos) (Quantity) (in Pesos) (Quantity) (in Pesos) (Quantity) (in Pesos)
X 50 2,500 60 3,000 70 3,500
Y 100 10,000 120 12,000 140 14,000
TOTAL 150 12,500 180 15,000 210 17,500 540 45,000
2. Production Budget- calculates the number of units of products that must be
manufactured, and is derived from a combination of the sales forecast and the
planned amount of finished goods inventory to have on hand (usually as safety
stock to cover for unexpected increases in demand). The production budget is
typically prepared for a "push" manufacturing system, as is used in a material
requirements planning environment. (Lifted from:
[Link]
Example:
Assumptions:
Product X’s cost of raw materials is P25.00 and Product Y’s cost of materials is P50.00.
The Production Budget
MU Enterprises
January-September 2020
Quarter 1 Quarter 1 Quarter 2 Quarter 2 Quarter 3 Quarter 3 Total Total
Volume Value Volume Value Volume Value Volume Value
Product (Quantity) (in Pesos) (Quantity) (in Pesos) (Quantity) (in Pesos) (Quantity) (in Pesos)
X 50 1,250 60 1,500 70 1,750
Y 100 5,000 120 6,000 140 7,000
TOTAL 150 6,250 180 7,500 210 8,750 540 22,500
Schedule of other cost
Quarter 1 Quarter 2 Quarter 3 Total
Utilities 1,000 1,000 1,000 3,000
Direct Labor Cost 500 500 500 1,500
Subtotal 4,500
[Link] Budget- consists of all revenues and expenses over a period of time
(typically a quarter or a year) which a corporation, government, or organization uses to
plan its operations. An operating budget is prepared in advance of a reporting period as
a goal or plan that the business expects to achieve. Below is an example of Operating
Budget:
Salaries and Wages
Number Position Quarterly Salary
1 Supervisor P3,000
3 1 Staff P1,500
Total 2 Personnel P4,500 (P4500x3=13,500)
Advertising
For 3 quarters
Tarpaulin P1,000
Flyers P1,000
Total P2,000
[Link] Statement
MU Enterprises
Income Statement Forecast
For the three quarters period Ending December 31, 2020
(in Pesos)
Sales 45,000
Less: Cost of Goods Sold (27,000)
Gross Profit 18,000
Less: Salaries and wages (13,500)
Marketing (2,000)
Operating Profit 2,500
Understanding Financial Budget
Cash Budget- is a budget or plan of expected cash receipts and disbursements during
the period. These cash inflows and outflows include revenues collected, expenses paid,
and loan receipts and payments. In other words, a cash budget is an estimated
projection of the company’s cash position in the future. (Lifted from:
[Link]
(The above image is lifted from: [Link]
Licensing & Attributions / References
tcc_joemarie. (2019). Financial Projections and budgets. [PowerPoint slides]. Retrieved from
[Link]
Santoyo, Alfredo, Lim, Edralin & Patiu, Liberty. (2018) Business Finance. MaxCor Publishing House Inc.
Accounting Tools. (2021). Retrieved January 18, 2021, from
[Link]
