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SUCCEED REVIEW CENTER

MANAGEMENT ADVISORY SERVICES


OCTOBER 2014 BATCH
BUDGETING

M. B. GUIA

Practice Problem 1: (Production Budget) Bledso Supply Corporation manufactures and sells cotton gauze. Expected sales of
gauze (in boxes) for upcoming months are as follows:
June ........................ 36,000
October .................. 30,000
July ........................ 40,000
November .............. 24,000
August ................... 50,000
December ............... 35,000
September .............. 38,000
Management likes to maintain a finished goods inventory equal to 25% of the next month's estimated sales.
Required:
1. Prepare the company's production budget for the third quarter of this year (the months of July, August and September)
in good form. Include a column for each month and a total column for the entire quarter.
2. Construct a purchase budget considering that the manufacturing of each unit of finished goods requires 2 pounds of raw
materials at an expected price of P4.00 per pound and an ending direct materials inventory of 10% of next quarters
production requirements is deemed sufficient
3. Construct a direct labor budget considering that two (2) hours of direct labor required for each unit and the company pay
an hourly wage rate of P10.00
4. Construct the manufacturing overhead budget based on the following overhead costs that are expected to be incurred:
Indirect Materials*
P1.00
Supervisory Salaries**
P 20,000
Indirect Labor*
1.40
Depreciation**
3,800
Utilities*
0.40
Property Tax**
9,000
Maintenance*
0.20
Maintenance**
5,700
*per direct labor hours
**per quarter
Practice Problem 2: (Cash Budget) You have been asked to prepare a December cash budget for Alaradi Company, a distributor
of exercise equipment. The following information is available about the companys operations:
a. The cash balance on December 1 is P48,000.
b. Actual sales for October and November and expected sales for December are as follows:
October
November December
Cash sales . . . . . . . . . . . . .
P78,000
P84,000
P99,600
Sales on account . . . . . . . .
P480,000 P630,000
P720,000
Sales on account are collected over a three-month period as follows: 30% collected in the month of sale, 50% collected
in the month following sale, and 19% collected in the second month following sale. The remaining 1% is uncollectible.
c. Purchases of inventory will total P336,000 for December. Twenty percent of a months inventory purchases are paid
during the month of purchase. The accounts payable remaining from Novembers inventory purchases total P193,200,
all of which will be paid in December.
d. Selling and administrative expenses are budgeted at P516,000 for December. Of this amount, P60,000 is for
depreciation.
e. A new Web server for the Marketing Department costing P91,200 will be purchased for cash during December, and
dividends totaling P10,800 will be paid during the month.
f. The company maintains a minimum cash balance of P24,000. An open line of credit is available from the companys
bank to bolster the cash position as needed.
Required:
1. Prepare a schedule of expected cash collections for December.
2. Prepare a schedule of expected cash disbursements for merchandise purchases for December.
3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the
month. Assume that any interest will not be paid until the following month.
Practice Quizzer
Items 1 and 2 are based on the following information:
Sta. Barbara is one of the manufacturers of a part used in the production of a popular consumer product. Sales of the consumer
product in 2014 are estimated at 5,000,000 units. Sta. Barbara regularly supplies 40% of the parts used in the new products.
Two parts units are needed for each product unit. Aside from the new products, there is also a replacement parts market. Over
the past three years, the company has sold the following number of replacement parts:
2011
300,000
2012
330,000
2013
363,000
This trend is expected to continue. The parts are sold for P4 per piece in the new products market and P4.50 in the replacement
parts market.
1. The estimated number of parts to be sold by Sta. Barbara in 2014 is
a. 2,399,850
b. 4,000,000
c. 4,399,300
d. 4,435,600
2. The amount of expected revenue based on the estimated number of parts to be sold in 2014 is
a. P9,796,850
b. P16,000,000
c. P 17,597,200
d. P17,796,850
Items 3 to 6 are based on the following information:
On April 1, 2014, the Dressmart, Inc. ask you to prepare monthly cash projections and other budget information for the second
quarter of 2014. The following is the companys partial balance sheet as at March 31, 2014:
Dressmart Inc.
Partial Balance Sheet
Cash
P 10,500
Accounts Payable
P 185,000
Accounts Receivable
520,000
Inventories
350,000
The budget shall be based on the following assumptions:
Sales transactions are on charge basis and billed at the end of the month.

Customers remitting payment within 15 days from billing date are given a 3% discount. Seventy-five percent of the total
billings are collected within one month following the month of sales with 66-2/3% of such being paid within the discount
period; 20% are collectible two months after billing and the remainder is considered uncollectible.
On the other hand, 60% of all material purchases and operating expenses are paid in the month these are purchased or
incurred while the remaining 40% is paid a month after.
Ending inventory in units (costing P20 per unit) is 40% higher than the following months sales in units.
Operating expenses are equal to 15% of the current months sales which amount includes depreciation of P4,000.
Actual and projected sales are as follows:
2014 Sales (in
Feb.
Mar.
Apr.
May
June
July
thousands
In pesos
420
450
426
390
435
462
In units
14.0
15.0
14.2
13.0
14.5
15.4
3. How much would the budgeted cash collections for the month of April be?
a. P414,750
b. P421,500
c. P 432,000
d. P 450,000
4. Assuming that no uncollectible accounts are written off during April, what would be the balance of the accounts
receivable at the end of April?
a. P 520,000
b. P 531,250
c. P 503,500
d. P 524,500
5. How much are the budgeted cash payments for June 2014?
a. P309,920
b. P368,470
c. P 372,470
d. P 379,870
6. What would be the projected net income for June 2014?
a. P 145,000
b. P 117,800
c. P 96,000
d. P 79,750
Items 7 to 9 are based on the following information:
The data were obtained from the January 31 balance sheet of Doromal Co. as follows:
Cash
P 16,000
Accounts Payable
P 165,000
A/R (net of allowance P4,000)
76,000
Inventory
32,000
Common Stock
100,000
PPE (net of Accum. Dep.
Retained Earnings (Deficit)
(P120,000)
80,000
( 61,000)
Total Assets
P 204,000
Total Liab. & Cap.
P 204,000
Sales are budgeted to be P 220,000 in February and P 240,000 in march. Collections are expected to be 60% in the month of
sale, 38% the next month, and the remaining 2% uncollectible. The gross profit rate is 25% of sales. Purchases, which are paid
in full the following month, are 75% of the next months budgeted sales. Operating expenses for each month, all paid in cash,
are P 33,000. Monthly depreciation is P 10,000.
7. What will be the budgeted cash collections for February?
a. P 208,000
b. P 132,000
c. P 203,000
d. None of these
8. What is the budgeted income (loss) before income tax for February?
a. P 7,600
b. (P3,000)
c. P 12,000
d. None of these
9. The projected balance in accounts payable at the end of February is?
a. P 172,500
b. P 180,000
c. P 165,000
d. None of these
Items 10 and 11 are based on the following information:
The sales manager of Kanlaon Trading has budgeted the following sales for the third quarter of 2014:
July
P 1,235,000
August
1,560,000
September
2,080,000
Other budget estimates are:
All merchandise are to sell at its invoice cost plus 30% mark-up
Beginning inventories of each month are budgeted at 40% of that months projected cost of goods sold.
10. The projected merchandise purchases for the month of July would be
a. P956,500
b. P850,000
c. P950,000
d. P1,050,000
11. The projected merchandise purchases for the month of August would be
a. P 1,237,600
b. P 1,040,000
c. P 1,200,000
d. P 1,360,000
Items 12 to 15 are based on the following information:
For purpose of preparing the cash projections and other budget estimates for the third quarter of 2014, the following information
is presented to you by the management of Virgo Corporation:
Second Quarter Sales Data
Pesos
Units
April
P 530,000
10,600
May
550,000
11,000
June
570,000
11,400
Project sales for the four months following the second quarter:
July
540,000
10,800
August
550,000
11,000
September
560,000
11,200
October
580,000
11,600
All sales are on charge basis and billed at the end of the month. A 5% discount is given on collections within the 15 days from
billing date. Sales collections are generally made as follows:
70% within the month following the billing date with 40% of this being collected within the discount period.
27% on the second month following the billing dates
3% considered uncollectible
Merchandise purchases are generally paid as follows:
50% within the month they are incurred
50% after the month they are incurred
Ending inventory in units (cost per unit is P 40,000) is 20% higher than the following months sales in units. Operating expenses
are on cash basis and are estimated to be 15% of the current months sales including monthly depreciation of P 10,000. As of
July 30, 2014, Accounts receivable balance was P630,000 and Merchandise Inventory was P 565,000.
12. The budgeted cash collections for the month of July would be
a. P 547,500
b. P 539,520
c. P556,020
d. P 391,020
13. The budgeted cash payment for the month of September would be

a. P 518,000
b. P 533,600
c. P 468,800
d. P 459,600
14. The projected net income for September is
a. P 122,200
b. P 112,000
c. P 28,000
d. P 38,000
15. The balance of accounts receivable at the end of July, assuming that no uncollectible accounts are written off for July
would be
a. P 622,500
b. P 645,660
c. P 613,980
d. P 630,480
16. The following purchases budget was prepared by Masagana Corp.
Month
Budgeted
Purchases
January
P 460,000
February
380,000
March
400,000
April
440,000
May
420,000
Purchases are paid for in the following manner;
10% in the month of purchase
50% in the month after purchase
40% two months after purchase
Total disbursements for the period March to May amount to
a. P 1,825,000
b. P1,352,000
c. P 1,285,000
d. P 1,232,000
17. Budji Corporation is preparing its budget for 2014. For 2013, the following were reported:
Sales
P 1,000,000
Cost of Goods Sold
600,000
Gross Profit
400,000
Operating expenses*
240,000
Net Income
P 160,000
*including depreciation of P 40,000
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
2014 of
a. P 167,100
b. P167,500
c. P 168,000
d. P 176,000
18. JLT Corporation expects to sell 150,000 units during the first quarter of 2014, with an ending inventory for the quarter of
20,000 units. Variable manufacturing costs are budgeted at P50 per unit, with 70% of total variable manufacturing costs
requiring cash payments during the quarter. Fixed manufacturing costs are budgeted at P 120,000 per quarter, 40% of
which are expected to require cash payments during the quarter. In the cash budget, payments for manufacturing costs
during the quarter will total
a. P 8,500,000
b. 5,950,000
c. P 5,998,000
d. P 5,298,000
19. Willians Company is budgeting sales to 42,000 units of Product Y for March 2014. To make one unit of finished product,
three kilos of raw material A are required. Actual beginning and desired ending inventory of raw material A and product
Y are as follows:
March 1, 2014
March 31, 2014
Raw Materials A
100,000 kilos
110,000 kilos
Product Y
22,000 units
24,000 units
There is no work-in process inventory for Product Y at the beginning and end of March. For the month of March, how
many kilos of raw material A is William planning to purchase?
a. 132,000
b. 136,000
c. 126,000
d. 142,000
20. RON Company is considering a proposal to replace existing machinery used for the manufacture of Product A. The new
machines are expected to cause increased annual fixed costs of P120,000; however, variable costs should decrease by
20% due to a reduction in direct labor hours and more efficient usage of direct materials. Before this change was under
consideration, RON had budgeted Product A sales and costs for 2014 as follows:
Sales
P 2,000,000
Variable Costs
70% of sales
Fixed Costs
400,000
Assuming that RON implemented the above proposal by January 1, 2014, what would be the increase in budgeted
operating profit for Product A for 2014?
a. P 360,000
b. P 280,000
c. P 480,000
d. P 160,000
Items 21 and 22 are based on the following information:
The Lending Corporation has the following historical pattern on its credit sales:
Collection during the month of sale
70%
First month after sale
15%
Second month after sale
10%
Third month after sale
4%
Uncollectible
1%
The sales on account of the last six months of the year were reported as follows:
July
P 120,000
August
140,000
September
160,000
October
180,000
November
200,000
December
170,000
21. Cash collections in October amounted to
a. P 168,800
b. P 42,800
c. P 178,200
d. P 126,000
22. The total cash collections during the fourth calendar quarter from sales made on account would be?
a. P 345,000
b. P 550,000
c. P 502,800
d. P 460,000
23. The following information were made available for Futuristic, Inc.
June 30, cash balance
P 900,000
Dividends paid in July
240,000
Cash expenditures in July for operating expenses
736,000

Depreciation expense in July


90,000
Cash collections in July
1,780,000
Merchandise purchases paid in cash in July
1,124,000
Purchased equipment for cash in July
350,000
It was the companys policy to keep minimum cash balance of P 200,000. The company:
a. Had to borrow P 200,000
b. Did not borrow since its ending cash balance amounted to P200,000
c. Did not borrow with its ending cash balance amounting to P 230,000
d. Had to borrow P 60,000
24. Soulful, Inc. desires to reduce its inventory of a particular raw material by 40%. The inventory at the beginning of the
budget period is 240,000 units, and the company plans to manufacture 168,000 units of output. Each of these units
requires 2.5 units of the raw materials. How much of the raw materials should be purchased during the budget period?
a. 316,000
b. 276,000
c. 324,000
d. 139,600
25. Beatless Corp. plans to sell 200,000 units of Let-It-Bee product in July and anticipates a growth in sales of 5% per
month. The target ending inventory in units of the product is 80% of the next months estimated sales. There are
150,000 units in inventory as of the end of June. The production requirement in units of Let-It-Bee for the quarter ending
September 30 would be
a. 670,560
b. 691,525
c. 665,720
d. 675,925
26. Pera Inc. prepared the following sales budget:
Month
Cash Sales
Credit Sales
February
P 80,000
P 340,000
March
100,000
400,000
April
90,000
370,000
May
120,000
460,000
June
110,000
380,000
Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale.
The remaining 5% is expected to be uncollectible. The companys total budgeted collection from April to June amounts
to
a. P 1,090,250
b. P 1,325,500
c. P 1,468,500
d. P 1,397,500
27. Monroe Products is preparing a cash forecast based on the following information.
o Monthly sales: December P200,000; January P200,000; February P350,000; March P400,000.
o All sales are on credit and collected the month following the sale.
o Purchases are 60% of next months sales and are paid for in the month of purchase.
o Other monthly expenses are P25,000, including P5,000 of depreciation.
If the January beginning cash balance is P30,000, and Monroe is required to maintain a minimum cash balance of
P10,000, how much short-term borrowing will be required at the end of February?
a. P60,000b. P70,000
c. P75,000
d. P80,000
Items 28 and 29 are based on the following information:
Stevens Company manufactures electronic components used in automobile manufacturing. Each component uses two raw
materials, Geo and Clio. Standard usage of the two materials required to produce one finished electronic component, as well as
the current inventory, are shown below.
Standard Material Per Unit
Price
Current Inventory
Geo
2.0 pounds
P15/lb.
5,000 pounds
Clio
1.5 pounds
P10/lb.
7,500 pounds
Stevens forecasts sales of 20,000 components for the next two production periods. Company policy dictates that 25% of the raw
materials needed to produce the next periods projected sales be maintained in ending direct materials inventory.
28. Based on this information, the budgeted direct material purchases for Geo for the coming period would be
a. P450,000
b. P675,000
c. P675,000
d. P825,000
29. The budgeted direct material purchases for Clio for the coming period would be?
a. P 450,000
b. P 300,000
c. P 400,000
d. P None of the above
30. The Mountain Mule Glove Company is in its first year of business. Mountain Mule had a beginning cash balance of
P85,000 for the quarter. The company has a P50,000 short-term line of credit. The budgeted information for the first
quarter is shown below.
January
February
March
Sales
P60,000
P40,000
P50,000
Purchases
35,000
40,000
75,000
Operating costs
25,000
25,000
25,000
All sales are made on credit and are collected in the second month following the sale. Purchases are paid in the month
following the purchase, while operating costs are paid in the month that they are incurred. How much will Mountain Mule
need to borrow at the end of the quarter if the company needs to maintain a minimum cash balance of P5,000 as
required by a loan covenant agreement?
a. P0
b. P5,000
c. P10,000
d. P45,000