Exercise 1

Dewitt Co. budgeted its activity for October 2019 from the following information:

 Sales are budgeted at P750,000. All sales are credit sales and a provision for
doubtful accounts is made monthly at the rate of 2% of sales.
 Merchandise inventory was P120,000 at September 30, 2019, and an increase of
P10,000 is planned for the month.
 All merchandise is marked up to sell at invoice cost plus 50%.
 Estimated cash disbursements for selling and administrative expenses for the month
are P105,000.
 Depreciation for the month is projected at P25,000.

Required: Calculate Dewitt's projected operating income for October 2019.

Solution:

Dewitt's

Budgeted Operating Income Statement

For the month of October 2019

Sales                   750,000.00 

Less: Cost of Sales    

Merchandise Inventory, Beg.                        120,000.00   

Add: Purchases                        510,000.00   

Less: Merchandise Inventory, End                     (130,000.00)             (500,000.00)

Gross Profit                   250,000.00 

Less: Operating Expenses    

Selling and Administrative Expenses                     (105,000.00)  

Doubtful Accounts Expense                        (15,000.00)  

Depreciation Expense                        (25,000.00)             (145,000.00)

Projected Operating Income                   105,000.00 

Computation of the Purchases in the Projected Operating Income Statement

Budgeted Purchases=  

Cost of Sales (750,000 / 150%)                        500,000.00 

Add: Merchandise Inventory, End                        130,000.00 

Less: Merchandise Inventory, Beg                     (120,000.00)

Purchases                        510,000.00 

Exercise 2

Michelle Enterprise reports the year-end information from 2019 as follows:

Sales (100,000 units) P250,000

Less: Cost of Goods Sold 150.000

Gross Profit 100,000

Less: Operating Expenses (including P10,000 depreciation) 60.000

Net Income P40,000

Michelle is developing the 2020 budget. In 2020, the company would like to increase selling prices by 10%, and as a
result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase
to 62%. Other than depreciation, all operating costs are variable.

Required: Prepare a budgeted Income statement for 2020.

Solution:

Note 1: Sales
Sales = Selling Price x Sales Volume
Projected Selling Price
Previous Sales   250,000.00
Divide: Previous Sales Volume   100,000.00
2019 Selling Price   2.50
x Increase by 10%  1.10
 2020 Selling Price   2.75

Projected Sales Volume

Previous Sales Volume 100,000.00
Less: 5% (Decrease in sales volume)     5,000.00
2020 Sales Volume 95,000.00
Sales
Selling Price (2020)    2.75
 x Sales Volume (2020)   95,000.00
Sales   261,250.00

Note 2: Operating Expenses

 Sales 250,000
Divide: Operating Expenses (Exclude Depreciation)  50,000
Percentage of Operating Expenses over Sales  20%

2020 Operating Expenses will be

Budgeted Sales 2020  261,250.00
 x Percentage of Operating Expenses over Sales 20%
Budgeted Operating Expenses   52,250.00 

Michelle Enterprises
Budgeted  Income Statement
for the year 2020
2019 2020
Sales (Note 1)  250,000.00  261,250.00
Less: Cost of goods sold (Budgeted for 2020 = 62% of sales (150,000.00) (161,975.00)
Gross Profit 100,000.00 99,275.00
Less: Operating Expenses
Operating Expenses ( Note 2) (50,000.00) (52,250.00)
Depreciation Expense (10.000.00) (10,000.00)
Projected Net Income 40,000 37,025.00 

Case 1

Russell Company has the following projected account balances for June 30, 2011:
Accounts payable $80,000
Sales $1,600,000
Accounts receivable 200,000
Capital stock 800,000
Depreciation, factory 48,000
Retained earnings ?
Inventories (5/31 & 6/30) 360,000
Cash 112,000
Direct materials used 400,000
Office salaries 160,000
Insurance, factory 8,000
Plant wages 280,000
Bonds payable 320,000
Equipment, net 480,000
Buildings, net 800,000
Utilities, factory 32,000
Selling expenses 120,000
Maintenance, factory 56,000
Required:
a. Prepare a budgeted income statement for June 2011
b). Prepare a budgeted balance sheet as of June 30, 2011,

Requirement A:
 Russell Company
Budgeted Income Statement
June 30, 2011
Sales 1,600,000.00
Less: Cost of Goods Sold
Beginning Inventory 360,000.00
Add: Purchases 400,000.00
Goods Avalable for Sale 760,000.00
Less: Ending Inventory 360,000.00 (400,000.00)
Gross Profit 1,200,000.00
Less: Operating Expenses
Depreciation Expense- Factory 48,000.00
Office Salaries Expense 160,000.00
Insurance Expense - Factory 8,000.00
Plant Wages Expense 280,000.00
Utilities Expense - Factory 32,000.00
Selling Expense 120,000.00
Maintenance Expense - Factory 56,000.00 (704,000.00)
Net Income 496,000.00
Computation for Inventory
Beg. Inventory (360,000) + Purchases (400,000) – Used Material (400,000) = Ending Inventory (360,000)
Requirement B:
Russell Company
Budgeted Balance Sheet
June 30, 2011
Assets
Cash 112,000.00
Accounts Receivable 200,000.00
Inventories 360,000.00
Equipment, Net 480,000.00
Buildings, Net 800,000.00
Total Assets 1,952,000.00
Liabilities and Equity
Accounts Payable 80,000.00
Office Salaries Payable *160,000.00
Insurance Payable *8,000.00
Utilities Payable *32,000.00
Maintenance Payable *56,000.00
Bonds Payable 320,000.00
Capital Stock 800,000.00
Retained Earnings 496,000.00
Total Liabilities and Equity 1,952,000.00

Note: Expenses assumed to be billed but not yet paid as of the period. Balance Sheet will not be balanced if not
assumed.

Case 2
Allscott Company is developing its budget for 2012. The initial 2012 income statement, based on static data from
2011, is as follows:

Sales (140,000 units) $420,000

Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000

Selling prices for 2012 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of
goods sold as estimated will decline by 10% per unit. Other than depreciation, all other operating costs are
expected to decline by 5%.

Required: Prepare a budgeted income statement for 2012

Solution:
Russell Company
Budgeted Income Statement
June 30, 2011
Sales (Note 1)
Less: Cost of Goods Sold (Note 2)
Gross Profit 360,000.00
Less: Operating expense (Note 3) 400,000.00
Net Income 760,000.00

Note 1: Computation of Sales

2011 Sales 420,000.00
Divide by: Units Sold 140,000.00
2011 Unit Price 3.00
Multiply by: Increase 0.08
Increase in Unit Price 0.24
2011 Unit Price 3.00
2012 Unit Price 3.24

2011 Sales Volume 140,000.00

Multiply by: Decrease 0.10
Decrease in Volume 14,000.00
2011 Sales Volume 140,000.00
2012 Sales Volume 126,000.00

2012 Sales Volume 126,000.00

2012 Unit Price 3.24
Sales 408,240.00
Note 2: Computation of Cost of goods sold
2011 Cost of Goods Sold 280,000.00
Divide by: Units Sold 140,000.00
2011 Unit Cost 2.00
Multiply by: Decrease 0.10
Decrease in Unit Cost 0.20
2011 Unit Cost 2.00
2012 Unit Co 1.80

2012 Sales Volume 126,000.00

2012 Unit Cost 1.80
Cost of Goods Sold 226,800.00

Note 3: Computation of Operating Expense

2011 Operating Cost 112,000.00
Less: Depreciation (28,000.00)
84,000.00
Multiply by: Decline 0.05
Decrease in Expenses 4,200.00
Expenses, excluding Depreciation 84,000.00
2012 Expenses, excluding Depreciation 79,800.00
28,000.00
2012 Operating Expenses 107,800.00