STRATEGIC COST MANAGEMENT

Functional & Activity -based Budgeting

1. What is a budget?
Budget It is actually a plan being quantified. It is by
budget that outlines the acquisition and use of
financial and other resources over some given
period of time.
Budgetary Control In involves the use of budgets to control the
actual activities of a company.

2. Benefits of Budgeting
It provides a means of communicating management’s plans throughout the organization.
It forces the managers to think about the future.
It provides a means of allocating resources to those parts of the organization where they can most
effectively used.
It can uncover bottlenecks or issues before they occur.
It provides a direction to the people in the organization.
It defines goals and objectives that can serve as benchmarks for evaluating subsequent performance.

3. What is a master budget?

Master Budget It represents a summary of all of management’s
plan and goals for the future, and outlines the
way in which these plans are to be accomplished.
Composition of Master Budget Plan Sales budget
Production budget
Raw materials
Direct labor
Manufacturing overhead
Selling and administrative expenses
Inventories

4. Pro forma Schedule of Budget

Sales Budget Units to be sold XXX
X Unit Selling price XXX
Sales Revenue PXXX

Production Budget Units to be sold XXX

Add: Desired End Invty ( FG) XXX
Total needs XXX
Less: Beg Inty ( FG) XXX
Units to be produced XXX

Direct Material Budget Units to be produced XXX

Multiply: Direct material per unit XXX
Production needs XXX
Add: Desired ending RM invty XXX
Total needs XXX
Less: Beginning RM XXX
Raw Materials to be purchased XXX
Multiply by unit price P XXX
Total Purchased cost PXXX

Direct Labor Budget Units to be pruchased XXX

Multiply: Direct labor time per unit XXX
Total hours needed XXX
Multiply: Rate per hour P XXX
 Total direct labor cost P XXX

Overhead Budget Budgeted DL hours XXX

Multiply:Var OH rate XXX
Budgeted variable OH XXX
Add: Budgeted Fixed Overhead XXX
Total overhead XXX

Cost of goods sold Budget Direct Materials XXX

Direct labor XXX
Overhead XXX
Budgeted manufacturing costs XXX
Add: Beg Inty ( FG) XXX
Goods available for sale XXX
Less: End Invty (FG) XXX
Budgeted COGS XXX

Budgeted Statement of Comprehensive Income Sales P XXX

Less: COGS XXX
Gross Margin XXX
Less: Selling and Admin Exp XXX
Operating income XXX
Less: Interest expense XXX
Income before taxes XXX
Less: Income Taxes XXX
Net Income PXXX

Cash Budget Beginning Cash balance P XXX

Add: Collections
Cash XXX
Credit sales XXX
Total cash available XXX
Less: Disbursements
Raw Materials XXX
Direct Labor XXX
Overhead XXX
Selling & Admin XXX
Income Taxes XXX
Equipment XXX
Total disbursements XXX
Cash Balance End before financing P XXX
Less: Financing
Borrowings XXX
Repayments (XXX)
Interest (XXX)
Total financing XXX
Ending Cash Balance XXX

Multiple Choice Exercise Questions (Answer Keys)

The following information pertains to Quarantine Corporation:

Month Sales Purchases
January P 30,000 P 16,000
February P 40,000 P 20,000
March P 50,000 P 28,000
  Cash is collected from customers in the following manner:
Month of sale 30%
Month of the following sale 70%
 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
 Labor cost are 20% of sales. Other operating costs are P 15,000 per month ( including P 4,000 of depreciation). Both of
these are paid in the month incurred.
 The cash balance on March 1 is P 4,000. A minimum cash balance of P 3,000 is required at the end of the month. Money
can be borrowed in multiples of P1,000.

1. How much cash will be collected from customers in March?

a. P 47,000 c. P 50,000
b. P 43,000 d. P 54,000

2. How much cash will be paid to suppliers in March?

a. P 23,200 c. P 44,000
b. P 28,000 d. P 48,000

3. How much cash will be disbursed in total in March?

a. P 21,000 c. P 44,200
b. P 25,000 d. P 48,300

4. What is the ending cash balance for March?

a. P( 25,000) c. P 3,200
b. P 3,000 d. P 3,800

Kobe Corporation has the following historical pattern on its credit sales:

70% collected in the month of sales

15% collected in the first month after sales
10% collected in the second month after sales
4% collected in the third month after sales
1% uncollectible

The sales on open account have been budgeted for the last six (6) months of 2020 as shown below.

July P 60,000
August 70,000
September 80,000
October 90,000
November 100,000
December 85,000

1. The estimated total cash collections during October 2020 from accounts receivable would be
a. P 63,000 c. P 89,100
b. P 84,400 d. P 21,400
2. The estimated total cash collections during the fourth calendar quarter from sales made on open account during the
fourth calendar quarter would be
a. P 172,500 b. P275,000 c. P 230,000 d. P 251,400