OUR LADY OF THE PILLAR COLLEGE – CAUAYAN

Cauayan City, Isabela

FinMan Gerry L. Carabbacan,

CPA, MBA
Instructor

BUDGETING

Budgeting – is planning on how to utilize an organization’s resources during a given

budget period.

Budget – plan, expressed in quantitative terms, on how to acquire and use the
resources of an entity during a
budget period for a certain future period of time.
– conversion of plans into figures for the future.
– is used for planning and controlling functions.

Example of the Flow of Budget Data in an Organization

(from lower levels of management to top)

President

Vice
President
Production

Manager Manager
Plant A Plant B

Department Department Department Department

Manager Manager Manager Manager

Uses / Advantages of Budgeting

1. It compels periodic planning.

Strategic Budgeting – a form of long range planning based on identifying
and specifying organizational goals and objectives.
2. It enhances cooperation, coordination, and communication.
3. It forces quantification of plans and proposals.
4. It provides a framework for performance evaluation.
Budgetary Slack – under-estimation of probable performance.
5. It enables members of the organization to be aware of business costs.
6. It satisfies some legal and contractual requirements.
7. It directs the activities toward the achievement of organizational goals.

Limitations of Budgeting

1. Since budgeting means planning for the future, the plan itself, as well as the
figures therein, are merely estimates, requiring a certain amount of judgment.
2. To be successful, a budgetary system requires the cooperation and participation
of all members of the organization.

1
 3. Some managers think that budget restricts their investments and limits
their decision-making power, making it difficult to sell the idea of budgeting to
some people in the organization.
4. The development and installation of a good budgetary system may be time-
consuming and too costly for some organizations, such that the benefits that can
be derived from budgeting may be outweighed by its costs.
Distinction Between Budget and Standard

Budgets Standards
Standards pertain to
1. Purpose Budgets are what costs
statements of might be if
expected costs. certain
highly
desirable
performan
ces are
attained.
Standards emphasize
2. Emphasis Budgets emphasize the levels
cost levels to which
that should costs
not be should be
exceeded. reduced.
Budgets are Standards are usually
3. Completeness customarily set only for
set for all the
department manufactur
s in the ing
firm – from divisions of
sales, the firm.
administrat
ion, to
manufactur
ing.
When actual costs
4. Analysis and When actual costs differ from
Breakdown differ from standards,
the budget, the nature
it may be and cause
an of the
indication difference
of either or variance
good or is
bad investigate
performanc d so that
e. necessary
corrective
actions are
taken in
time.

The Budget Committee – usually composed of the sales manager, production

manager, chief engineer, treasurer, and controller.

Budget Review Process

2
 Prepares Revise
Budget
Proposals

No

Yes
Budget Acce Implement
Review pt ?

The Budget Committee’s Principal Functions:

1. Formulate and decide on general policies relating to the firm’s budgetary system.
2. Request, review, and revise (if necessary) individual budget estimates from
the different segments of the organization.
3. Approve budgets and subsequent revisions therein.
4. Receive, evaluate, and analyze budget reports.
5. Recommend necessary actions to improve operational efficiency and
effectiveness.

Budget Manual – describes how a budget is prepared; includes a budget

planning calendar and distribution instructions for all budget schedules.

Budget Planning Calendar – the schedule of activities for the development

and adoption of the budget.

Master Budget – represents the overall plan of the organization for a given
budget period.
– consists of all the individual budgets for each of the segment
of the organization aggregated or consolidated into one overall
budget for the entire firm.

Budget Report – shows a comparison of the actual and budget performance. The
budget variances, which
are properly described as either favorable or unfavorable, are also
shown on the report.

Basic Components of a Master Budget for a Manufacturing Firm

Manufacturing Company
Master Budget
Operating Budget Financial
Budget

Sales Budget Budgeted Cost of Goods Sold Budgeted Balance

Sheet
Ending Inventories Budget Selling Expense Budget Cash Budget
Production Budget: Administrative Expense Budget Capital
Expenditure Budget
Direct Materials Budget Budgeted Income from Operations Budgeted Cash
Flow Statement
Direct Labor Budget Budgeted Non-Operating Items
Factory Overhead Budget Budgeted Net Income

Basic Components of the Master Budget

3
 Sales
Budget

Productio
n Budget

Direct Direct Manufactu

Materials Labor ring Operating Budgets
Budget Budget Overhead

Selling and
Administrat
ive Expense
Budget

Budgeted
Income
Statement

Capital Budgeted
Expenditu Cash Balance
re Budget Sheet
Financial Budgets

Budgeted
Cash Flow
Statement

Operating Budget – a plan on how an organization will carry out its operations
in order to meet the demand
for its goods or services.

Financial Budget – a plan that shows how the organization will acquire its
financial resources, such as
through the issuance of stock or incurrence of debt.

Budget Report – compares actual performance with budgeted performance.

Continuous (Rolling) Budget – one that is revised on a regular (continuous) basis;

typically, the budget is extended for another month or quarter in
accordance with new data as the current month or
quarter ends.

Fixed (Static) Budget – based on only one level of activity or production.

Flexible (Variable, Dynamic) Budget – a series of budgets prepared for many levels
of activity.

Capital Budget – is a long-term budget that shows planned acquisition and

disposal of capital assets, such
as land, buildings, and equipment.
4
 Zero-Base Budgeting (ZBB) – a budget and planning process in which each manager
must justify a department’s entire budget from a base of zero every
period; all expenditures must be justified
regardless of the variance from the previous periods; the
objective is to encourage periodic re-examination of all costs in
the hope that some can be reduced or eliminated.

Life-Cycle Budget – estimates a products revenues and expenses over its entire life
cycle beginning with research and development, proceeding through
the introduction and growth stages, into the maturity stage, and
finally, into the harvest or decline stage. It accounts for, and
emphasizes the relationships
among the costs at all stages of the value chain.

Value Chain:

R&D Design Production Marketing Distribution

Customer Service

Incremental Budgeting – a budgeting process wherein the current period’s budget

is simply adjusted to allow for
changes planned for the coming period.

Activity-Based Budgeting – applies activity-based costing principles to budgeting.

The activities are identified, a
cost pool is established for each activity, a cost driver is
identified for each pool, and
the budgeted cost for each pool is determined by multiplying
the budgeted demand
for the activity by the estimated cost per unit of such activity.

Kaizen Budgeting – assumes the continuous improvement (Kaizen) of products

and processes, usually by
way of many small innovations rather than major changes; it
incorporates expectations for
continuous improvement into budgetary estimates.

Government Budgeting – unlike in a private sector budget, a government budget is

not only a financial plan and a
basis for performance evaluation but also an expression of public
policy and a form of
control having the force of law.

Comprehensive Illustration

A case study of Myriad Company will be used in preparing the operating and
financial budgets. The company manufactures and sells a single product, Dining-
Ware. The budgets will be prepared by quarters for the year ending December 31,
2018. Myriad Company begins its annual budgeting process on September 1, 2017,
and it completes the budget for 2018 by December 1, 2017. Using the following
assumptions, prepare the pertinent budgets for Myriad Company:

Sales volume is expected to be 3,000 units in the first quarter with 500-unit
increments in each succeeding quarter, based on a sales price of P 60.00 per unit.

On the basis of past experience, the company believes it can meet future sales
requirements by maintaining an ending inventory equal to 20% of the next quarter’s
budgeted sales volume.

5
 Because of its close proximity to suppliers, the company has found that an ending
inventory of raw materials equal to 10% of the next quarter’s production is
sufficient. The manufacture of each Dining-Ware requires 2 pounds of raw materials
and the expected cost per pound is P 4.00.

At Myriad Company, two hours of direct labor are required to produce each unit of
finished goods, and the anticipated hourly wage rate is P 10.00.

From previous experience, the company expects variable costs to fluctuate with
production volume on the basis of the following rates per direct labor hour: indirect
materials P 1.00, indirect labor P 1.40, utilities P 0.40, and maintenance P 0.20. The
company also recognizes that some maintenance is fixed. Fixed costs for each
quarter include: supervisory salaries P 20,000, depreciation P 3,800, property
taxes and insurance P 9,000, maintenance P 5,700. At Myriad, overhead is applied
to production on the basis of direct labor hours.

The company combines its operating expenses into one budget, the selling and
administrative expense budget. In this case, the variable expense rates per unit of
sales are sales commissions P 3.00, and freight-out P 1.00. Fixed expenses for every
quarter include: advertising P 5,000, sales salaries P 15,000, office salaries P 7,500,
depreciation P 1,000, property taxes and insurance P 1,500.

Interest expense is expected to be P 100 and income taxes are estimated to be P

12,000.

Assume that Myriad Company prepares an annual cash budget by quarters. It is

based on the following assumptions:

1. The January 1, 2018, cash balance is expected to be P 38,000.

2. Sales – 60% are collected in the quarter sold and 40% are collected in the
following quarter. Accounts receivable of P 60,000 at December 31, 2017,
are expected to be collected in full in the first quarter of 2018.
3. Marketable securities are expected to be sold for P 2,000 cash in the first
quarter.
4. Direct materials – 50% are paid in the quarter purchased and 50% are paid
in the following quarter. Accounts payable of P 10,600 at December 31,
2017, are expected to be paid in full in the first quarter of 2018.
5. Direct labor – 100% is paid in the quarter incurred.
6. Manufacturing overhead and selling and administrative expenses – all
items except depreciation are paid in the quarter incurred.
7. Management plans to purchase a new truck in the second quarter for P
10,000 cash.
8. The company makes equal quarterly payments of its estimated annual
income taxes.
9. The company resorts to short-term borrowing in case the cash balance is
insufficient at the end of the quarter. The company maintains a P15,000
cash availability each quarter.
10. Loans are repaid in the first subsequent quarter in which there is
sufficient cash.

Relevant data from the budgeted balance sheet at December 31, 2017, are as
follows:

Building and equipment P 182,000 Ordinary shares P

225,000
Accumulated depreciation 28,800 Retained earnings
46,480
Required:

1. Prepare the operating budgets (sales, production, manufacturing, selling

and administrative, income statement)
2. Prepare the financial budgets (cash, balance sheet, cash flow)
6
 OUR LADY OF THE PILLAR COLLEGE – CAUAYAN
Cauayan City, Isabela

Exercises in Accounting 12b Frank R. Dalupang,

CPA, MBA
Management Advisory Services (MAS) Part II Instructor

OPERATIONAL AND FINANCIAL BUDGETING

Multiple Choice

1. The starting point in preparing a comprehensive budget is

A. the sales forecast. C. the budgeted income statement.
B. the cash budget. D. the flexible expense budget.

2. Budgets are related to which of the following management functions?

A. Planning. B. Control. C. Performance evaluation. D. All of the above.

3. Which of the following should be used to forecast sales?

A. Regression analysis. C. The judgment of the most experienced
managers.
B. The scatter diagram. D. Whatever method produces the most
accurate forecast.

4. A critical factor for using indicator methods to forecast sales is

A. the availability of a forecasted value for the indicator.
B. an upward trend in the value of the indicator.
C. governmental collection of data for computing and reporting the value of the
indicator.
D. the availability of an indicator that covers the entire country.

5. Which of the following equations can be used to budget purchases? (BI = beginning
inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold)
A. Budgeted purchases = CGS + BI – EI C. Budgeted purchases = CGS
7
 + EI + BI
B. Budgeted purchases = CGS + BI D. Budgeted purchases = CGS + EI
– BI

6. A flexible budget is
A. one that can be changed whenever a manager so desires.
B. adjusted to reflect expected costs at the actual level of activity.
C. one that uses the formula total cost = cost per unit x units produced.
D. the same as a continuous budget.

7. The use of flexible (as opposed to static) budget allowances is LEAST important for
which of the following?
A. Costs of the production department. C. Costs of the product
shipping department.
B. Costs of the general accounting department. D. Costs of the material
receiving department.

8. Budgets set at very high levels of performance (i.e., very low costs)
A. assist in planning the operations of the company.
B. stimulate people to perform better than they ordinarily would.
C. are helpful in evaluating the performance of managers.
D. can lead to low levels of performance.

9. Inventory policy is most critical in the budgeting of

A. sales. B. cost of goods sold. C. purchases. D. expenses.

10. Budgeting expenditures by purpose is called

A. program budgeting. C. line budgeting.
B. zero-based budgeting. D. flexible budgeting.

11. Which of the following is a difference between a static budget and a flexible
budget?
A. A flexible budget includes only variable costs, a static budget includes only
fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity; a
static budget does not.
D. None of the above.

12. A static budget is most appropriate for a department

A. with only fixed costs. C. with mostly mixed costs.
B. with only variable costs. D. with any of the above characteristics.

13. Which of the following is not an advantage of budgeting?

A. It requires managers to state their objectives.
B. It facilitates control by permitting comparisons of budgeted and actual results.
C. It facilitates performance evaluation by permitting comparisons of budgeted
and actual results.
D. It provides a check-up device that allows managers to keep close tabs on their
subordinates.

14. An imposed budget

A. is the same as a static budget. C. is best for planning purposes.
B. can lead to poor performance. D. eliminates the need for a sales
forecast.

15. Prohibiting managers from overspending budget allowances

A. improves company performance.
B. can harm company performance.
C. eliminates the need for comparisons of budgeted and actual amounts.
8
 D. usually reduces the need to prepare a cash budget.

16. Which of the following will occur if X Co.'s actual sales in May are lower than
its budgeted sales for that month?
A. X won't have enough cash to cover bills requiring payment in May.
B. X's actual inventory at the end of May will be higher than budgeted.
C. X's actual purchases in June will be higher than budgeted.
D. All of the above.

17. JIT manufacturers are more likely than conventional manufacturers to

A. use static budget allowances for manufacturing costs.
B. prepare production budgets without a sales forecast.
C. budget unit production equal to budgeted unit sales.
D. experience budget variances.

18. If cash receipts from customers are greater than sales, which of the following
is most likely to be true?
A. The balance of accounts receivable will decrease.
B. The company's outstanding debt will decrease.
C. The company's cash balance will increase.
D. The company will show a profit.

19. A cash budget is not prepared until a company has

A. obtained a commitment from its bank that cash will be available as needed.
B. prepared the pro forma balance sheet.
C. prepared its purchases budget.
D. determined that enough cash is available to meet dividend payments.

20. Which of the following is least likely to be affected if unit sales for this month
are lower than budgeted?
A. Production for this month. C. Cash receipts for next month.
B. Production for next month. D. Inventory at the end of this month.

21. "Incremental budgeting" refers to

A. line-by-line approval of expenditures.
B. setting budget allowances based on prior year expenditures.
C. requiring top management approval of increases in budgets.
D. using incremental revenues and costs in budgeting.

22. The principal disadvantage of line budgeting is

A. it can only be used by not-for-profit entities.
B. it limits the flexibility of managers to accomplish the entity's objectives.
C. it works only in conjunction with zero-based budgeting.
D. none of the above.

23. The cash receipts budget

A. requires a sales forecast. C. is prepared after the cash
disbursements budget.
B. requires a purchases or production budget. D. has none of the above
characteristics.

24. The type of company most likely to run short of cash during the year is one
with
A. little seasonality. C. high seasonality and rapid sales
growth.
B. high contribution margin percentage. D. relatively low fixed costs.

25. If a company is earning a profit,

A. its cash balance is increasing. C. its inventory is increasing.
B. its monthly cash disbursements will be stable. D. it might have to borrow
money.

9
26. One difference between budgeting in for-profit and not-for-profit entities is
that not-for-profit entities usually
A. budget expenses before revenues.
B. don't need a cash budget.
C. are less likely to use incremental budgeting.
D. use computer software-packages to facilitate the budgeting process.

27. To prepare its cash disbursements budget, a company uses information from
A. its balance sheet at the end of the prior period. C. its capital budget.
B. its purchases budget. D. all of the above sources.

28. Just-in-time manufacturers are more likely than conventional manufacturers to

A. prepare production budgets without a sales forecast.
B. budget materials purchases equal to the current month's needs for
production.
C. budget unit production for the month at greater than budgeted unit sales for
the month.
D. experience cash shortages.

29. Quorum Company desires an ending inventory of P 120,000. It expects sales of

P 240,000 and has a beginning inventory of P 80,000. Cost of sales is 60% of sales.
Budgeted purchases are
A. P 120,000. B. P 144,000. C. P 184,000. D. P 264,000.

30. Garamond Company budgeted purchases of P 200,000. Cost of sales was P

240,000 and the desired ending inventory was P 84,000. The beginning inventory
was
A. P 40,000. B. P 64,000. C. P 84,000. D. P 124,000.

31. Wildwood Company budgeted purchases of 20,000 units. The budgeted

beginning inventory was 4,800 units and the budgeted ending inventory was 6,000
units. Budgeted sales were
A. 18,800 units. B. 21,200 units. C. 24,800 units. D. 26,000 units.

32. Menomonie Company budgeted sales of 18,000 units. The budgeted beginning
inventory was 3,000 units and the budgeted ending inventory was 5,000 units.
Budgeted production is
A. 23,000 units. B. 21,000 units. C. 20,000 units. D. 16,000 units.

33. Baker Company budgets supplies as P 20,000 + (P 1.20 x direct labor hours).
Baker has budgeted 18,000 direct labor hours, P 130,000 direct labor cost. The
flexible budget allowance for supplies is
A. P 18,000. B. P 20,000. C. P 150,000. D. some other
number.

34. Equinox Company budgeted sales of 44,000 units for January, 60,000 for
February. The budgeted beginning inventory for January 1 was 14,000 units.
Equinox desires an ending inventory equal to one-half of the following month's sales
needs. Budgeted production for January is
A. 74,000 units. B. 60,000 units. C. 52,000 units. D. 28,000 units.

35. Sams Company manufactures a single product. It keeps its inventory of

finished goods at 75% the coming month's budgeted sales, inventory of raw
materials at 50% of the coming month's budgeted production needs. Each unit of
product requires two pounds of materials. The production budget is, in units: May,
1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in June would
be
A. 1,525 pounds. B. 2,550 pounds. C. 2,800 pounds. D. 3,050 pounds.

36. Hayward Company desires an ending inventory of P 70,000. It expects sales of

P 400,000 and has a beginning inventory of P 65,000. Cost of sales is 65% of sales.
Budgeted purchases are
10
 A. P 265,000. B. P 395,000. C. P 405,000. D. P 535,000.

37. Bryce Company budgeted sales of 50,000 units for January, 60,000 for
February. Bryce Company desires an ending inventory equal to one-half of the
following month's sales needs. Inventory on January 1 was as desired. Budgeted
production for January is
A. 22,000 units. B. 52,000 units. C. 55,000 units. D. 74,000 units.
38. Chetek Company budgeted purchases of 19,000 units. The budgeted
beginning inventory was 12,400 units and the budgeted ending inventory was
13,000 units. Budgeted sales were
A. 32,000 units. B. 31,400 units. C. 18,400 units. D. 19,600 units.

39. Barron Company manufactures a single product. Barron keeps inventory of

raw materials at 50% of the coming month's budgeted production needs. Each unit
of product requires three pounds of materials. The production budget is, in units:
May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in July
would be
A. 1,450 pounds. B. 2,400 pounds. C. 3,900 pounds. D. some other number.

40. Acker Company has prepared the following flexible budget for production
costs: total production costs = P 260,000 + P 5X, where X is the number of
machine hours. Acker produced 20,000 units, using 34,000 machine hours at a total
cost of P 425,000. The flexible budget allowance for production costs is
A. P 260,000. B. P 425,000. C. P 430,000. D. P 525,000.

41. Scooter Inc. has projected sales to be P 130,000 in June, P 135,000 in July and
P 150,000 in August. Scooter collects 30% of a month's sales in the month of sale,
50% in the month following the sale, and 16% in the second month following the
sale. Cash collections in August would be
A. P 45,000. B. P 127,300. C. P 133,300. D. P 138,500.

42. Rundall Co. makes payments for purchases 30% during the month of purchase
and the remainder the following month. April purchases are projected to be P
160,000; May purchases will be P 240,000. Cash payments in May will be
A. P 72,000. B. P 108,000. C. P 168,000. D. P 184,000.

43. Randall Co. makes payments for purchases 30% during the month of purchase
and the remainder the following month. April purchases are projected to be P
80,000; May purchases will be P 120,000. The accounts payable balance on May 31
will be
A. P 36,000. B. P 54,000. C. P 84,000. D. P 92,000.

44. Alfuth Co. makes payments for purchases 10% during the month of purchase,
60% in the following month, and the remainder in the second month following the
purchase. Purchases are projected to be P 260,000 in January, P 280,000 in
February, and P 320,000 in March. March payments will be
A. P 32,000. B. P 168,000. C. P 278,000. D. some other
number.

45. Reid Co. makes payments for purchases 10% during the month of purchase,
60% in the following month, and the remainder in the second month following the
purchase. Purchases are projected to be P 130,000 in January, P 140,000 in
February, and P 160,000 in March. The March 31 accounts payable balance will be
A. P 48,000. B. P 96,000. C. P 144,000. D. P 186,000.

46. Andover Inc. has projected sales to be: February, P 10,000; March, P 9,000;
April, P 8,000; May, P 10,000; and June, P 11,000. Andover has 30% cash sales and
70% sales on account. Accounts are collected 40% in the month following the sale
and 55% collected the second month. Total cash receipts in May would be
A. P 3,000. B. P 8,150. C. P 8,705. D. some other number.

47. Conde Inc. has projected sales to be: February, P 20,000; March, P 18,000;
11
 April, P 16,000; May, P 20,000; and June, P 22,000. Conde has 30% cash sales and
70% sales on account. Accounts are collected 40% in the month following the sale
and 60% collected the second month. Accounts receivable for May 31 would be
A. P 6,160. B. P 13,300. C. P 14,000. D. P 20,720.

48. Holmgren estimates its supplies purchases to be P 21,000 in August and P

28,000 in September. Holmgren pays 70% of its accounts in the month of purchase
with the remainder paid the following month. September payments would be
A. P 14,700. B. P 19,600. C. P 23,100. D. P 25,900.

49. Danner Inc. has projected sales to be P 100,000 in June, P 90,000 in July, and
P 70,000 in August. Danner collects 50% of a month's sales in the month of sale,
30% in the month following the sale, and 16% in the second month following the
sale. Cash collections in August would be
A. P 35,000. B. P 62,000. C. P 78,000. D. P 86,000.

50. a 50. Clearwater Inc. has projected sales to be P 160,000 in April, P 200,000
in May, and P 240,000 in June. Clearwater collects 40% of a month's sales in the
month of sale, 40% in the month following the sale, and 20% in the second month
following the sale. The accounts receivable balance on June 30 would be
A. P 184,000. B. P 144,000. C. P 40,000. D. some other
number.

True-False

F 1. A just-in-time manufacturer does not need a sales budget.

T 2. A flexible budget allowance is not especially useful for budgeting discretionary costs.

F 3. The purchases budget is prepared before the sales budget because the company
cannot estimate what it will sell until it has some idea of what will be on hand.

F 4. The longer the time period covered by a budget, the more useful the budget will be
for controlling operations.

F 5. A purchases budget is normally prepared after the company has forecast how much
cash it will have available to pay for purchases.

F 6. Imposed budgets are exceptionally ambitious goals not likely to be achieved without
making fundamental changes in the way a job is done.

F 7. A JIT manufacturer that maintains no inventory doesn't need a cash disbursements

budget.

F 8. The budget for a retailer is likely to be more complex than that for a manufacturer
because a retailer has a wider variety of customers.

F 9. The increasing public demand for accountability from governmental and other not-
for-profit organizations has resulted in an increased use of incremental budgeting.

T 10. Line-by-line budget authorization is common in governmental units.

Problems

1. Ballan Inc. estimates its units sales for the coming months to be as follows:

March 280,000 June 230,000

April 260,000 July 240,000
May 250,000 August 225,000

Ballan maintains inventory at budgeted sales needs for the next month. March 1
inventory will be 248,000 units.
12
 a. Prepare a monthly purchasing schedule for March through July.

SOLUTION:

a. March purchases: 292,000 units [280,000 + 260,000 – 248,000]

April purchases: 250,000 units [260,000 + 250,000 – 260,000]

May purchases: 230,000 units [250,000 + 230,000 – 250,000]

June purchases: 240,000 units [230,000 + 240,000 – 230,000]

July purchases: 225,000 units [240,000 + 225,000 – 240,000]

2. Superior Company manufactures a single product. It keeps its inventory of finished

goods at twice the coming month's budgeted sales and inventory of raw materials at
150% of the coming month's budgeted production. Each unit of product requires five
pounds of materials, which cost P 3 per pound. The sales budget is, in units: May,
10,000; June, 12,400; July, 12,600; August, 13,200.

a. Compute budgeted production for June.

b. Compute budgeted production for July.

c. Compute budgeted material purchases for June in pounds and pesos.

SOLUTION:

a. June production: 12,800 units [12,400 + (2 x 12,600) - (2 x 12,400)]

b. July production: 13,800 units [12,600 + (2 x 13,200) - (2 x 12,600)]

c. June materials purchases: 71,500 pounds; P 214,500

Used in production (5 lbs. x 12,800) 64,000 lbs.

Ending inventory (5 lbs. x 13,800 x 150%) 103,500
Total 167,500
Less beginning inventory (5 lbs. x 12,800 x 150%) 96,000
Purchases 71,500
Times cost per pound P 3
Equals Peso purchases P 214,500
=======
3. Ironwood sells a single product for P 10. The purchase cost is P 4 per unit and
Ironwood pays a 20% sales commission. Fixed costs are P 45,000 per month including
P 12,000 depreciation, and the company maintains inventory equal to budgeted sales
needs for the following month. The following budgeted data are available.

Inventory on hand, February 1 28,000 units

Budgeted sales - February 24,000 units
- March 26,000 units
- April 25,000 units

a. Compute total budgeted income for February and March.

b. Find budgeted inventory at March 31 in units and pesos.

c. Find budgeted purchases for March in units and pesos.

13
 SOLUTION:

a. Budgeted income: P 110,000

Sales [(24,000 + 26,000) x P 10] P 500,000

Cost of sales (50,000 x P 4) 200,000
Gross profit P 300,000
Commissions at 20% 100,000
Contribution margin P 200,000
Fixed costs (P 2 x 45,000) 90,000
Income P 110,000
======

b. Budgeted inventory: 25,000 units; P 100,000 (P 4 x 25,000)

c. Budgeted purchases: 25,000 units; P 100,000

Cost of sales 26,000 units P 104,000

Ending inventory 25,000 100,000
Total required 51,000 P 204,000
Less beginning inventory 26,000 104,000
Purchases 25,000 units x P 4 P 100,000
===== ======

4. Westrum estimates production overhead costs equal to P 300,000 + P 2X, where X is

the number of machine hours used. Westrum budgeted 40,000 machine hours for
20X4. Westrum produced 23,000 units in 20X4, each requiring 3 machine hours.
Actual production costs were P 420,000.

a. Calculate the flexible budget allowance for production overhead costs for 20X4.
b. Find the amount and direction of the budget variance for 20X4 for production
overhead. (favorable or unfavorable) Circle one answer.
SOLUTION:

a. Flexible budget allowance, P 438,000 [P 300,000 + (23,000 x 3 x P 2)]

b. Budget variance: P 18,000 favorable (P 438,000 – P 420,000)

5. Acme Inc. estimates its peso sales for the coming months to be as follows.

June P 340,000 September P 260,000

July 360,000 October 240,000
August 300,000 November 200,000

Acme has an average gross margin of 40% of sales and maintains inventory at 75% of
budgeted sales needs for the next month. Acme began June with P 150,000 in
inventory.

a. Prepare a monthly purchasing schedule (in Peso) for as many months as is possible.

SOLUTION:

a. June July August September October

Sales P 340,000 P 360,000 P 300,000 P 260,000 P 240,000
x 40% x 0.40 x 0.40 x 0.40 x 0.40 x 0.40
Cost of Sales P 136,000 P 144,000 P 120,000 P 104,000 P 96,000
+ Ending Inv 108,000 90,000 78,000 72,000 60,000
- Beg Inv (150,000) (108,000) (90,000) (78,000) (72,000)
Purchases P 94,000 P 126,000 P 108,000 P 98,000 P 84,000
======= ======= ======= ======= =======

6. Bay City estimates production overhead costs equal to P 200,000 + P 4X + P 7Y, where
14
 X is the number of direct labor hours used and Y is the number of machine hours used.
Bay City budgeted 20,000 direct labor hours and 50,000 machine hours for 20X2. Bay
City produced 30,000 units in 20X2, each requiring 1 direct labor hour and 2.5
machine hours. Actual production costs were P 890,000.

a. Calculate the flexible budget allowance for production overhead costs for 20X2.

b. Find the amount and direction of the budget variance for 20X2 for production
overhead. (favorable unfavorable) Circle one answer.

SOLUTION:

a. Flexible budget allowance, P 845,000 [P 200,000 + (30,000 x 1 x P 4) + (30,000 x

2.5 x 7)]

b. Budget variance: P 45,000 unfavorable (P 845,000 – P 890,000)

7. Webster Company has the following sales budget.

January P 200,000 March P 300,000
February 240,000 April 360,000

Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in
the following month. Webster keeps inventory equal to double the coming month's
budgeted sales requirements. It pays for purchases 80% in the month of purchase and
20% in the month after purchase. Inventory at the beginning of January is P
190,000. Webster has monthly fixed costs of P 30,000 including P 6,000 depreciation.
Fixed costs requiring cash are paid as incurred.

a. Compute budgeted cash receipts in March.

b. Compute budgeted accounts receivable at the end of March.
c. Compute budgeted inventory at the end of February.
d. Compute budgeted purchases in February.
e. March purchases are P 290,000. Compute budgeted cash payments in March to
suppliers of goods.
f. Compute budgeted accounts payable for goods at the end of February.
g. Cash at the end of February is P 45,000. Cash disbursements are not required for
anything other than payments to suppliers and fixed costs. Compute the budgeted
cash balance at the end of March.

SOLUTION:

a. March receipts: P 264,000 [(P 240,000 x 60%) + (P 300,000 x 40%)]

b. Receivables at end of March: P 180,000 [P 300,000 x (100% - 40%)]

c. Inventory at end of February: P 420,000 (P 300,000 x 70% x 2)

d. February purchases: P 252,000 [(P 240,000 x 70%) + (P 300,000 x 2 x 70%) - (P

240,000 x 2 x 70%)]

e. March payments: P 282,400 [(252,000 x 20%) + (P 290,000 x 80%)]

f. AP at end of February: P 50,400 (P 252,000 x 20%)

g. Cash at end of March: P 2,600 (P 25,000 + P 264,000 – P 282,400 – P 24,000)

8. Weasel Company has the following sales projections for 20X3:

January P 200,000 April P 230,000

15
 February 210,000 May 245,000
March 225,000 June 240,000

Weasel collects 40% of its sales in the month of sale, 45% in the month following the
sale and 13% in the second month following the sale. Records show that sales were P
225,000 in November and P 208,000 in December 20X2.

a. Prepare a schedule of cash receipts for the first three months of 20X3.
b. What would be the accounts receivable (net of bad debts) balance on March 31,
20X3?

SOLUTION:

a. January collections: (13% x 225,000) = P 29,250

(45% x 208,000) = 93,600
(40% x 200,000) = 80,000
P 202,850
======

February collections: (13% x 208,000) = P 27,040

(45% x 200,000) = 90,000
(40% x 210,000) = 84,000
P 201,040
======

March collections: (13% x 200,000) = P 26,000

(45% x 210,000) = 94,500
(40% x 225,000) = 90,000
P 210,500
======

b. P 157,800 P 27,300 = February sales 210,000 x 13%

130,500 = March sales 225,000 x (45% + 13%)
P 157,800
======

9. Bismarck has the following sales budget:

March P 300,000 May P 320,000

April 312,000 June P 348,000

Cost of sales is 55% of sales. Bismarck keeps an inventory equal to one-fourth the
coming month's budgeted sales requirements. It pays for purchases 40% in the month
of purchase and 60% in the month after purchase. Accounts Payable is P 94,800 on
March 1.

a. Prepare a monthly purchasing schedule for March through May.

b. Prepare a monthly cash payment schedule for March through May.

c. Compute the accounts payable balance as of May 31.

SOLUTION:

a. March April May

Sales P 300,000 P 312,000 P 320,000
x 55% x 0.55 x 0.55 x 0.55
Cost of Sales P 165,000 P 171,600 P 176,000
+ Ending Inv 42,900 44,000 51,975
- Beg Inv (41,250) (42,900) (44,000)
Purchases P 166,650 P 172,700 P 183,975
16
 ====== ====== ======

b. March payments: (40% x 166,650) = P 66,660

Mar 1 Acct Pay = 94,800
P 161,460
=========

April payments: (40% x 172,700) = P 69,080

(60% x 166,650) = 99,990
P 169,070
=========

May payments: (40% x 183,975) = P 73,590

(60% x 172,700) = 103,620
P 177,210
=========

c. Accounts Payable, May 31: P 110,385 [60% x P 183,975]

10. Hicks Company has the following sales projections for 20X4:

January P 160,000 March P 175,000 May P 195,000

February 168,000 April 180,000 June 190,000

Hicks collects 30% of its sales in the month of sale, 45% in the month following the
sale, and 24% in the second month following the sale. Records show that sales were P
160,000 in November and P 168,000 in December 20X3.

a. Prepare a schedule of cash receipts for the first three months of 20X4.

b. What would be the accounts receivable balance (net of bad debts) on March 31,
20X4?

SOLUTION:

a. January collections: (24% x 160,000) = P 38,400

(45% x 168,000) = 75,600
(30% x 160,000) = 48,000
P 162,000
=========

February collections: (24% x 168,000) = P 40,320

(45% x 160,000) = 72,000
(30% x 168,000) = 50,400
P 162,720
========

March collections: (24% x 160,000) = P 38,400

(45% x 168,000) = 75,600
(30% x 175,000) = 52,500
P 166,500
=========

b. P 161,070 P 40,320 = February sales (168,000 x 24%)

120,750 = March sales [175,000 x (45% + 24%)]
P 161,070
=========

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