OBJECTIVES

• Explain the importance of planning.

• Differentiate between strategic
planning and tactical planning.
• Enumerate and apply the steps in
planning.
 PRODUCTION

A production budget provides information regarding the number of

units that should be produced over a given accounting period based
on expected sales and targeted level of ending inventories.
 PRODUCTION

It is computed as follows:

Required production in units = Expected Sales + Target Ending Inventories - Beginning

Inventories
Example:
1. Company forecasts sales in units for January to May as
follows:

2. Moreover, Company would like to maintain 100 units in its

ending inventory at the end of each month.
3. Beginning inventory at the start of January amounts to 50
units.
4. How many units should Company produce in order to fulfill
Operations budget refers to the variable and fixed costs needed to
run the operations of the company but are not directly attributable to
the generation of sales
OPERATIONS BUDGET
Examples of this are the following:

• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
The cash budget, or cash forecast, is a statement of the firm’s planned inflows and
outflows of cash. It is used by the firm to estimate its short-term cash
requirements, with particular attention being paid to planning for surplus cash and
for cash shortages (Gitman & Zutter, 2012).
A. From the sales forecast, identify how much would be
collected in the cash budget period. Sales may be made in
cash or for credit.
Continuing from previous example:

1. Assume selling price is PHP100/unit.

2. Sales for each month are expected to be collected as
follows:
• Month of sales : 20%
• A month after sales: 50%
• 2 months after sales: 30%
B. Identify other receipts.
Examples:
‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings

• Add these receipts to the collections from sales to get to

total receipts
C. From the Production Budget, identify how much of the
purchases made will be paid by the company on the cash
budget period. Like sales, purchases may be made in cash or on
credit depending on the supplier’s credit terms.

Continuing from previous example:

‣ Assume that cost per unit is PHP50.

‣ All purchases this month are paid the following month.
‣How much is total cash disbursements for purchases ?
D. From the operations budget, identify which expenses will be
paid in cash during the cash budget period.

The following expense items will be paid based on the following

periods:

• Rent payments: Rent of PHP5,000 will be paid each month.

• Wages and salaries: Fixed salaries for the year are
PHP96,000, or PHP8,000 per month. Wages are estimated as
10% of monthly sales.
E. Identify all other cash payments to be made.

Examples:
• Fixed-asset purchases in cash of Php 130, 000 are to be paid
in April.
• Interest payment is paid on May for Php 10, 000.
• Cash dividend payments amounting to Php 20, 000 are to be
paid on January.
• Principal Payments amounting to Php 20,000 are to be paid
on February.
F. Match the receipts and disbursements on the periods they
become collectible and payable, respectively.
G. Set a minimum required cash balance. This balance is
maintained in case contingencies arise.
H. If the net cash flow is above the minimum cash balance, the
company is in excess cash and may consider putting it in short
term investments. If it is below, the company should make a
short term borrowing during that period.
Moreover, Company has a beginning cash balance of PHP80,000
and would like to maintain an ending cash balance of PHP100,000
per month. Prepare Company’s Cash Budget for January to May.
Prepare a cash budget.
Evaluating the Cash Budget:
‣ If the ending cash balance after payment of all required
disbursements is less than the required ending balance, the
company needs to borrow additional cash from short term
borrowings to meet its required ending balance. Should the
ending cash balance exceed the company’s minimum cash
requirement the next period, the company may be able to repay
the loan plus accrued interest.
‣ Should the Company have excess cash above its required
maintaining cash balance, the company may invest this cash on
short term investments so that it will have an opportunity to
earn additional profits. If the company’s cash balance would
 Company forecasts sales in units for January to March as follows:
January February March
Units 2000 3000 4000
Assume that the selling price is PHP 300/unit and are expected to be collected as follows:
o Month of sales: 20%
o A month after sales: 50%
o 2 months after sales: 30%
Interest received in January amounted to Php 50 000.
The company would like to maintain the following units per month:
January February March
Units 500 750 850
Beginning inventory at the start of January amounts to 75 units.
Assume that the cost per unit is Php 275
All purchases are paid in the following month.
Rent payments: Rent of PHP 7 000 will be paid each month.
Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of
monthly sales.
Taxes of Php 10 000 will be paid on March.
Moreover, company has beginning cash balance of Php 75 000 and would like to maintain an ending cash balance of
Php 100 000/month
 Company forecasts sales in units for January to March as follows:
January February March
Units 2500 3500 45000
Assume that the selling price is PHP 500/unit and are expected to be collected as follows:
o Month of sales: 20%
o A month after sales: 50%
o 2 months after sales: 30%
Interest received in March amounted to Php 35 000.
The company would like to maintain the following units per month:
January February March
Units 1200 1500 1600
Beginning inventory at the start of January amounts to 150 units.
Assume that the cost per unit is Php 300
All purchases are paid in the following month.
Rent payments: Rent of PHP 9 000 will be paid each month.
Wages and salaries: Fixed salaries for the year are PHP60,000, or PHP 5,000 per month. Wages are estimated as 15% of
monthly sales.
Taxes of Php 50 000 will be paid on February.
Moreover, company has beginning cash balance of Php 80 000 and would like to maintain an ending cash balance of
Php 250 000/month