COMPREHENSIVE BUDGETING

The ICA Corporation makes Product K, which it sells for P155 per thousand.

Annie See, manages the inventory and finances of the company. She estimates

sales for the following months to be:

January P263,500 (1,700,000 units)

February P186,000 (1,200,000 units)

March P217,000 (1,400,000 units)

April P310,000 (2,000,000 units)

May P387,500 (2,500,000 units)

Last year’s sales were P175, 000 in November and P232, 500 in December

(1,500,000 units).

Ms. See is preparing for a meeting with Par Banking Corporation to

arrange the financing for the first quarter. Based on her sales forecast and the

following information she has provided, you have to prepare a monthly cash

budget, a monthly and quarterly pro forma income statement, a pro forma

quarterly statement of Financial Position, and all necessary supporting

schedules for the first quarter.

Past history shows that the Corporation collects 50 percent of its

accounts receivable in the normal 30-day credit period (the month after the

sale) and the other 50 percent in 60 days (two months after the sale). It pays

for its materials 30 days after receipt. In general, Ms. See likes to keep a twomonth supply of
inventory in anticipation of sales. Inventory at the beginning of

December was 2,600,000 units. (This was not equal to her desired two-month

supply.)

The major cost of production is the purchase of raw materials S,

which are cut, threaded, and finished. Last year raw material costs were P52

1
per 1,000 units, but Ms. See has just been notified that material costs have

risen, effective January 1, to P60 per 1,000 units. The Corporation uses FIFO

inventory accounting.

Labor costs are relatively constant at P20 per thousand units, since

workers are paid on a piecework basis. Overhead is allocated at P10 per

thousand units, and selling and administrative expense is 20 percent of sales.

Labor expense and overhead are direct cash outflows paid in the month

incurred, while interest and taxes are paid quarterly.

The corporation usually maintains a minimum cash balance of P25,

000, and it puts its excess cash into marketable securities. The average tax

rate is 40 percent, and the company usually pays out 50 percent of net income

in dividends to stockholders. Marketable securities are sold before funds are

borrowed when a cash shortage is faced. Ignore the interest on any short-term

borrowings. Interest on the long-term debt is paid in March, as are taxes and

dividends.

As of year-end, the ICA Corporation statement of financial position was as follows:

ICA Corporation

Statement of Financial Position

December 31, 20-6

ASSETS

Current assets:

Cash P 30,000

Accounts receivable 320,000

Inventory 237,800

Total current assets Plant and equipment, 587,800

-net of accumulated depreciation of P200,000 800,000

2
Total Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

P1,387,800

Accounts payable P 93,600

Long-term debt, 8% 400,000

Common stock 504,200

Retained earnings 390,000

Total Liabilities and Stockholders’ Equity P1,387,800

Required: Prepare the following for the first quarter of 20-7

a. Cash budget with supporting schedules

b. Budget Income Statement

c. Budget Statement of Financial Position

SCHEDULE 1: BUDGET PRODUCTION

BUDGET SALE+ENDING INV= AVAILABLE

AVAILABLE- BEG INV= BUDGET PRODUCTION

DECEMBER JANUARY FEBRUARY MARCH TOTAL

ACTUAL SALE 1,500,000 1,700,000 1,200,000 1,400,000 4,300,000

ENDING INVENTORY 2,900,000 2,600,000 3,400,000 4,500,000 10,500,000

AVAILABLE 4,400,000 4,300,000 4,600,000 5,900,000 14,800,000

BEGINNING INVENTORY - 2,600,000 - 2,900,000 - 2,600,000 - 3,400,000 - 8,900,000

BUDGET PRODUCTION 1,800,000 1,400,000 2,000,000 2,500,000 5,900,000

SCHEDULE 2: PAYMENT FOR PURCHASES

JANUARY

DECEMBER 1,800,000

DIVIDE 1,000

MULTIPLY 52

3
PAYMENT IN JANUARY FOR 93,600

DECEMBER PURCHASE

FEBRUARY

JANUARY 1,400,000

DIVIDE 1,000

MULTIPLY 60

PAYMENT IN FEBRUARY FOR 84,000

JANUARY PURCHASE

MARCH

FEBRUARY 2,000,000

DIVIDE 1,000

MULTIPLY 60

PAYMENT IN MARCH FOR 120,000

FEBRUARY PURCHASE

TOTAL 297,600

SCHEDULE 3: BUDGETED COLLECTIONS ON ACCOUNTS RECEIVABLE

JANUARY FEBRUARY MARCH TOTAL

NOVEMBER SALES 87,500 87,500

DECEMBER SALES 116,250 116,250 232,500

JANUARY SALES 131,750 131,750 263,500

FEBRUARY SALES 93,000 93,000

TOTAL 203,750 248,000 224,750 676,500

SCHEDULE 4: ACCOUNTS RECEIVABLE

FEBRUARY'S ACCOUNTS 186000*0.5 93,000

MARCH'S SALES 217,000

OUTSTANDING A/R, MARCH 31 310,000

4
SCHEDULE 5: COMPUTATION OF COST OF SALES

CURRENT UNIT COST PER 1000

MATERIAL 52

LABOR 20

OVERHEAD 10

TOTAL-JANUARY, FEBRUARY 82

EFFECTIVE, JANUARY 1

CURRENT UNIT COST PER 1000

MATERIAL 60

LABOR 20

OVERHEAD 10

TOTAL-MARCH 90

JANUARY 1700@82 139,400

FEBRUARY 1200@82 98,400

MARCH 1400@90 126,000

COST OF GOODS SOLD (1ST Q) 363,800

Strategic Business Analysis Notes (3rd yr 2nd sem, S.Y. 2020-2021) Mrs. Marcelina V. Mendoza

SCHEDULE 4: ACCOUNTS RECEIVABLE

FEBRUARY'S ACCOUNTS 186000*0.5 93,000

MARCH'S SALES 217,000

OUTSTANDING A/R, MARCH 31 310,000

SCHEDULE 5: COMPUTATION OF COST OF SALES

CURRENT UNIT COST PER 1000

MATERIAL 52

LABOR 20

OVERHEAD 10

5
TOTAL-JANUARY, FEBRUARY 82

EFFECTIVE, JANUARY 1

CURRENT UNIT COST PER 1000

MATERIAL 60

LABOR 20

OVERHEAD 10

TOTAL-MARCH 90

JANUARY 1700@82 139,400

FEBRUARY 1200@82 98,400

MARCH 1400@90 126,000

COST OF GOODS SOLD (1ST Q) 363,800

PROFORMA INCOME STATEMENT

JANUARY FEBRUARY MARCH TOTAL

SALES 263,500 186,000 217,000 666,500

COST OF GOODS SOLD 139,400 98,400 126,000 363,800

GROSS PROFIT 124,100 87,600 91,000 302,700

SELLING EXPENSES, 20%*SALES 52,700 37,200 43,400 133,300

OPERATING INCOME 71,400 50,400 47,600 169,400

INTEREST EXPENSE, 400,000*8% 2,666.67 2,666.67 2,666.67 8,000

INCOME BEFORE TAX 68,733 47,733 44,933 161,400

INCOME TAX, 40% 27,493 19,093 17,973 64,560

NET INCOME 41,240 28,640 26,960 96,840

DIVIDENT, 50% OF TOTAL NET INCOME (MARCH) 48,420

SCHEDULE 6: CASH BUDGET

JANUARY FEBRUARY MARCH

CASH COLLECTIONS 203,750 248,000 224,750

6
CASH DISBURSEMENTS

PAYMENT FOR MATERIALS 93,600 84,000 120,000

LABOR EXPENSES 28,000 40,000 50,000

OVERHEAD 14,000 20,000 25,000

SELLING AND ADMINISTRATIVE 52,700 37,200 43,400

INTEREST 8,000

TAXES 64,560

DIVIDENDS 48,420

TOTAL DISBURSEMENTS - 188,300 - 181,200 - 359,380

NET CASH INFLOW(OUTFLOW) 15,450 66,800 - 134,630

CASH BALANCE, BEGINNING 30,000 25,000 25,000

CUMULATIVE CASH BALANCE 45,450 91,800 - 109,630

MARKETABLE SECURITIES 20,450 66,800

PREVIOUS MS - 20,450

CUMULATIVE MS 20,450 87,250 87,250

BORROWINGS - - 47,380

CASH BALANCE, END 25,000 25,000 25,000

TOTAL CASH+MS 45,450 112,250 25,000

PROFORMA STATEMENT OF FINANCIAL POSITION

CASH 25,000

ACCOUNTS RECEIVABLE 310,000

INVENTORIES 405,000

PPE (NET) 800,000

TOTAL ASSETS 1,540,000

ACCOUNTS PAYABLE 150,000

NOTES PAYABLE 47,380

7
LONG TERM DEBT 400,000

COMMON STOCK 504,200

RETAINED EARNINGS (BEG+NI-DIV) 438,420

TOTAL LIABILITIES AND EQUITY 1,540,000