Part IV – The Master Budget Exercises

Discussion Questions:
1. Define the term budget. How are budgets used in planning?
 Budget is a financial plan of the resources needed to carry out task and meet
financial goals. Budget is a key management tool for planning, monitoring, and
controlling the finance of an organization. It estimates the income and expenditures for a
set period of time. Budgeting is centred on the efficient allocation of scarce
organizational resources to help achieve strategic priorities and objectives.

2. Define control. How are budgets used to control?

Control is a function of management which helps to check errors in order to take
corrective actions. This is done to minimize deviation from standards and ensure that the
stated goals of the organization are achieved in a desired manner. The use budgets to
control a firm’s activities is known as budgetary control.  Budgetary control helps
planning, coordination between departments, decision-making, monitoring of operating
results and motivation of personnel to achieve business objectives.

3. What is a master budget? An operating budget? A financial budget?

A master budget is a business strategy that documents expected future sales,
productions levels, purchases, future expenses incurred, capital investments, and even
loads to be acquired and repaid.
The operating budget contains the expenditure and revenue generated from the
daily business functions of the company. The operating budget concentrates on the
operating expenditures, including cost of produce sold in the market or popularly known
as cost of sold goods and the revenue or income.
A financial budget in budgeting means predicting the income and expenses of the
business on a long-term and short-term basis. Accurate projections of cash flow help the
business achieve its targets in the right way.

4. All budgets depend on the sales budget. Is this true? Explain.

Yes, all budgets depend on sales budgets because budgets can't exceed the amount
of available money. Sales budgets are the estimated sales in units and in value prepared for
the coming period. Sales budgets are operational budgets that affect various other budgets
of an organization. Sales budgets provide a basis of all other budgets within an
organization. When sales are poor, the budgets will be smaller.

5. Why is it important for a manager to receive frequent feedback on his or her performance?

6. A budget too easily achieved will lead to diminished performance. Do you agree? Explain.
Exercises:
1. Preparing a Sales Budget

Patrick Inc. sells industrial solvents in five-gallon drums. Patrick expects the following
units to be sold in the first three months of the coming year.
January 41,000
February 38,000
March 50,000
The average price for a drum is P35.
Required: Prepare a sales budget for the first three months of the coming year, showing units and
sales revenue by month and in total for the quarter.

Patrick Inc
Sales Budget
For the year ended 2020

Estimated Sales
Month Units Price Per Unit Total Sales Revenue
January 41,000 ₱ 35 ₱ 1,435,000
February 38,000 ₱ 35 ₱ 1,330,000
March 50,000 ₱ 35 ₱ 1,750,000
TOTAL ₱ 4,515,000

2. Preparing a Production Budget

Patrick Inc. makes industrial solvents. In the first four mounts of the coming year, Patrick
expects the following unit sales:
January 41,000
February 38,000
March 50,000
April 51,000
Patrick’s policy is to have a 25% of next month’s sales in ending inventory. On January 1, it is
expected that there will be 6,700 drums of solvent on hand.
Required: Prepare a production budget for the first quarter of the year. Show the number of drums
that should be produced each month as well as for the quarter in total.
 Patrick Inc.
Production Budget
For the year ended 2020

January February March TOTAL

Units to be sold 41,000 38,000 50,000
Add: Desired Ending Inventory 9,500 12,500 12,750
Total 50,500 50,500 62,750
Less: Beginning Inventory -6,700 -6,700 -6,700
Units to be produced 43,800 43,800 56,050 143,650

3. Preparing a Direct Materials Purchases Budget

Patrick Inc. makes industrial solvent sold in five-gallon drums. Planned production in
units for the first three months of the coming year is:
January 43,800
February 41,000
March 50,250

Each drum requires 5.5 gallons of chemicals and one plastic drum. Company policy
requires that ending inventories of raw materials for each month be 15% of the next month’s
production needs. That policy was met for the ending inventory of December in the prior year.
The cost of one gallon of chemicals is P2.00. The cost of one drum is P1.60. (Note: Round all unit
amounts to the nearest unit.

Required:
a. Calculate the ending inventory of chemicals in gallons for December of the prior
year, and for January and February. What is the beginning inventory of chemicals for
January?

December: 240,900 x 15% = 36,135 –beg inv for Jan.

January: 225,500 x 15% = 33,825
February: 276,375 x 15% = 41,456.25

b. Prepare a direct materials purchases budgets for chemicals for the months of January
and February.
 Patrick Inc.
Raw Materials Purchases
For the year ended 2020

Gallons of Chemicals January February

Units to be produced 43,800 41,000

DM per unit 5.5 5.5
Production needs 240,900 225,500
Add: Desired Ending Inventory 33,825 41,456.25
Total units required 274,725 266,956
Less: Beg. Inventory -36,135 -33,825
Units to be purchase 238,590 233,131

Unit Price ₱ 2 ₱ 2
Total Purchases ₱ 477,180 ₱ 466,262.50

c. Calculate the ending inventory of drums for December of the prior year, and for
January and February.

December: 43,800 x 15% = 6,570

January: 41,000 x 15% = 6,150
February: 50,250 x 15% = 7,537.50

d. Prepare a direct materials purchases budgets for drums for the months of January and
February.

Patrick Inc.
Raw Materials Purchases
For the year ended 2020

Plastic Drum

Units to be produced 43,800 41,000

DM per unit 1 1
Production Needs 43,800 41,000
Add: Desired Ending Inventory 6,150 7,537.50
Total units required 49,950 48,538
Less: Beg. Inventory -6,570 -6,150
Units to be purchase 43,380 42,388
Unit Price ₱ 1.60 ₱ 1.60
Total Purchases ₱ 69,408.00 ₱ 67,820.00
 4. Preparing a Direct Labor Budget
Patrick Inc. makes industrial solvents. Planned production in units for the first three
months of the coming year is:
January 43,800
February 41,000
March 50,250
Each drum of industrial solvent takes 0.3 direct labor hours. The average wage is P18 per hour.
Required: Prepare a direct labor budget for the months of January, February, and March,
as well as the total for the first quarter.

Patrick Inc.
Direct Labor Budget
For the year ended 2020

January February March Total

Units to be produced 43,800 41,000 50,250
x Direct Labor hours 0.3 0.3 0.3
Total Hours needed 13,140 12,300 15,075
x Average wage per hour ₱ 18 ₱ 18 ₱ 18
Total Budgeted Direct Labor cost ₱ 236,520 ₱ 221,400 ₱ 271,350 ₱ 729,270

5. Preparing an Overhead Budget

Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first three
months of the coming year are:
January 13,140
February 12,300
March 15,075
The variable overhead rate is P0.70 per direct labor hour. Fixed overhead is budgeted at P2,750
per month.
Required: Prepare an overhead budget for the months of January, February, and March, as well as
the total for the first quarter. (Note: Round all dollar amounts to the nearest dollar.)
 Patrick Inc.
Overhead Cost Budget
For the year ended 2020

January February March Total

Units to be produced 13,140 12,300 15,075
x Variable Overhead ₱ 0.70 ₱ 0.70 ₱ 0.70
Budgeted Variable Overhead ₱ 9,198 ₱ 8,610 ₱ 10,552.50
Fixed Overhead ₱ 2,750 ₱ 2,750 ₱ 2,750
Total Overhead ₱ 11,948 ₱ 11,360 ₱ 13,302.50 ₱ 36,610.50

6. Preparing an Ending Finished Goods Inventory Budget.

Andrew Company manufactures a line of office chairs. Each chair takes P14 of direct
materials and uses 1.9 direct labor hours at P16 per direct labor hour. The variable overhead rate
is P1.20 per direct labor hour and the fixed overhead rate is P1.60 per direct labor hour. Andrews
expects to have 675 chairs in ending inventory. There is no beginning inventory of office chairs.
Required:
a. Calculate the unit product cost. (Note: Round to the nearest cent.)

Direct Material 14
Direct Labor (1.9 x P16) 30.4
Variable Overhead (1.9 x P1.20) 2.28
Fixed Overhead ( 1.9 x P1.60) 3.04
Total Cost 49.72

b. Calculate the cost of budgeted ending inventory. (Note: Round to the nearest dollar.)
675 x 49.72 = P33,561
7. Preparing a Cost of Goods Sold Budget

Andrews Company manufactures a line of office chairs. Each chair takes P14 of direct
materials and uses 1.9 direct labor hours at P16 per direct labor hour. The variable overhead rate
is P1.20 per direct labor hour and the fixed overhead rate is P1.60 per direct labor hour. Andrews
expects to produce 20,000 chairs next year andexpects to have 675 chare in ending inventory.
There is no beginning inventory of office chairs. Prepare a cost of goods sold budget for Andrews
Company.
 Andrew Company
Budgeted Statement of Cost of Sales
For the year ended 2020

Direct Materials used (P14 x 20,000) ₱ 280,000

Direct Labor used (1.9 x P16 x 20,000) ₱ 608,000
Variable Overhead Cost ( 1.9 x P1.20 x 20,000) ₱ 45,600
Fixed Overhead Cost (1.9 x P1.60 x 20,000) ₱ 60,800
Budgeted Manufacturing costs ₱ 994,400
Beginning Finished goods -
Cost of goods available for sale ₱ 994,400
Less: Ending Finished goods ( 675 x 49.72) -₱ 33,561
Budgeted cost of sales ₱ 960,839

1. Preparing a Selling and Administrative Expenses Budget

Fazel Company makes and sells paper products. In the coming year, Fazel expects total
sales of P19,730,000. There is a 3% commission on sales. In addition, fixed expenses of
the sales and administrative offices include the following:

Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000
Required: Prepare a selling and administrative expenses budget for Fazel Company for
the coming year.
Fazel Company
Budgeted Selling and Administrative Costs
For the year ended 2020

Variable S&A expenses

Sales Commision (19,730,000 x 3%) 591,900
Fixed S&A expenses:
Salaries 960,000
Utilities 365,000
Office Space 230,000
Advertising 1,200,000
Total Fixed Expenses 2,755,000
Total S&A Expenses 3,346,900
2. Preparing a Budgeted Income Statement

Oliver Company provided the following information for the coming year:

Units produced and sold 160,000

Cost of goods sold per unit P 6.30
Selling price P 10.80
Variable S&A expenses per unit P 1.10
Fixed S&A expenses P423,000
Tax rate 35%
Required: Prepare a budgeted income statement for Oliver Company for the coming year.
(Note: Round all income statement amounts to the nearest dollar.)

Oliver Company
Budgeted Income Statement
3. Preparing a
For the year ended 2020
schedule of
Cash
Sales ( 160K x P10.80) ₱ 1,728,000
Collections
Less: COGS (160K x P6.30) -₱ 1,008,000
on Accounts
Gross Margin ₱ 720,000
Less: Variable S&A Expenses (160K x P 1.10) -₱ 176,000
Kailua and
Less: Fixed S&A Expenses -₱ 423,000
Company is
Operating Income ₱ 121,000
a legal
Less: Income Tax (P121,000 x 35%) -₱ 42,350 services
Net Income ₱ 78,650 firm. All
sales of legal services are billed to the client (there are no cash sales). Kailua expects that,
on average, 20% will be paid in the month of billing, 50% will be paid in the month
following billing, and 25% will be paid in the second month following billing. For the
next five months, the following sales billings are expected:

May P84,000
June 100,800
July 77,000
August 86,800
September 91,000
Required: Prepare a schedule showing the cash expected in payments on accounts
receivable in August and in September.
4. Preparing an Accounts Payable Schedule
Wight Inc. purchases raw materials on account for use in production. The direct
materials purchases budget shows the following expected purchase on account:
 April P374,400
May 411,200
June 416,000

Wight typically pays 20% on account in the month of billing and 80% the next month.
Required:
a. How much cash is required for payment on account in May?
b. How much cash is expected for payments on account in June?

5. La Famiglia Pizzeria provided the following information for the month of October:

a. Sales are budgeted, to be P157,000. About 85% of sales are cash; the remainder are
on account.
b. La Famiglia expects that, on average, 70% of credit sales will be paid in the month of
sale, and 28 will be paid in the following month.
c. Food and supplies purchases, all on account, are expected to be P116,000. La
Famiglia pays 25% in the month of purchase and 75% in the month following
purchase.
d. Most of the work is done by the owners, who typically withdraw P6,000 a month
from the business as their salary. (Note: The P6,000 is a payment in total to the two
owners, not per person.) Various part-time workers cost P7,300 per month. They are
paid for their work weekly, so on average 90% of their wages are paid in the month
incurred and the remaining 10% in the next month.
e. Utilities average P5,950 per month. Rent on the building is P4,100 per month.
f. Insurance is paid quarterly; the next payment of P1,200 is due in October.
g. September sales were P181,500 and purchases of food and supplies in September
equalled P130,000.
h. The cash balance on October 1 is P2,147.
Required:
a. Calculate the cash receipts expected in October. (Hint: Remember to include both cash
sales and payments from credit sales.)
b. Calculate the cash needed in October to pay for food purchases.
c. Prepare a cash budget for the month of October.

6. Select Operational Budgets

Joven Products produces coat racks. The projected sales for the first quarter of the
coming year and the beginning and ending inventory data are as follows:

Unit Sales 100,000

Unit Price P 15
 Units in beginning inventory 8,000
Units in targeted ending inventory 12,000

The coat racks are molded and then painted. Each rack requires four pounds of
metal, which costs P2.50 per pound. The beginning inventory of materials is 4,000
pounds. Joven Products wants to have 6,000 pounds of metal in inventory at the end of
the quarter. Each rack produced requires 30 minutes of direct labor time, which is billed
at P9 per hour.

Required:
a. Prepare a sales budget for the first quarter.
b. Prepare a production budget for the first quarter
c. Prepare a direct materials purchases budget for the first quarter.
d. Prepare a direct labor budget for the first quarter.

7. Cash Budgeting
Kylles Inc. expects to receive cash from sales of P45,000 in March. In addition,
Kylles expects to sell property worth P3,500. Payments for materials and supplies are
expected to total P10,000, direct labor payroll will be P12,500, and other expenditures are
budgeted at P14,900. On March 1, the cash account balance is P1,230.
Required:
a. Prepare a cash budget for Kylles Inc. for the month of March.
b. Assume that Kylles Inc. wanted a minimum cash balance of P15,000 and that
it could borrow from the bank in multiples of P1,000 at an interest rate of 12%
per year. What would the adjusted ending balance for March be for Kylles?
How much interest would Kylles owe in April, assuming that the entire
amount borrowed in March would be paid back?