OUR LADY OF THE PILLAR COLLEGE - CAUAYAN

Cauayan City, Isabela

FinMan Gerry L. Carabbacan, CPA,

MBA
Instructor

(Solution to Illustrated Problem – Budgeting)

Myriad Company
Sales Budget (1)
For the Year Ending December 31, 2018

Quarter _
1 2 3 4 Year _

Expected unit sales 3,000 3,500 4,000 4,500 15,000

Unit selling price (P) 60 60 60 60 60 _________
Total sales P180,000 P210,000 P240,000 P270,000 P900,000
===================================
Notes:
The sales budget is the first budget prepared. It is derived from sales forecast, and it represents
management’s best estimate of sales revenue for the budget period. It is prepared by multiplying the expected unit
sales volume for each product by its anticipated unit selling price. 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 per unit, the sales

Myriad Company
Production Budget (2)
For the Year Ending December 31, 2018

Quarter
1 2 3 4 Year

Expected unit sales 3,000 3,500 4,000 4,500 15,000

Add: Desired ending finished goods units¹ 700 800 900 1,000 ² 1,000
Total required units 3,700 4,300 4,900 5,500 16,000
Less: Beginning finished goods units 600 ³ 700 800 900 600
Required production units 3,100 3,600 4,100 4,600 15,400
====================================
Notes:
¹ 20% of next quarter’s sales
² Expected 2018 first quarter sales (5,000 units x 20%)
³ 20% of estimated first quarter 201 sales units
The production budget shows the units that must be produced to meet anticipated sales. Production
requirements are determined from the formula [ (Budgeted Sales Units + Desired Ending Finished Goods Units) –
Beginning Finished Goods Units = Required Production Units ]. A realistic estimate of ending inventory is essential

Myriad Company
Direct Materials Budget (3)
For the Year Ending December 31, 2018

Quarter
1 2 3 4 Year

Units to be produced 3,100

3,600 4,100 4,600 15,400
Direct materials per unit (pounds) *2 *2 *2 *2 _ *2
Total pounds needed for production 6,200 7,200 8,200 9,200 30,800
Add: Desired ending direct materials (pounds)¹ 720 820 920 1,020 3,480²
Total materials required 6,920 8,020 9,120 10,220 34,280
Less: Beginning direct materials (pounds) 620 ³ 720 820 920 3,080
Direct materials purchases 6,300 7,300 8,300 9,300 31,200
Cost per pound (P) 4 4 4 4 4
Total cost of direct materials purchases P25,200 P 29,200 P33,200 P37,200 P124,800
====================================
Notes:
¹ 10% of next quarter’s production 1
² Estimated 2007 first quarter pounds needed for production (10,200 x 10%)
³ 10% of estimated first quarter pounds needed for production
 Myriad Company
Direct Materials Budget (3)
For the Year Ending December 31, 2018

Notes (continued):
The direct materials budget contains both the quantity and cost of direct materials to be purchased. The
quantities of direct materials are derived from the formula [ (Direct Materials Units Required for Production +
Desired Ending Direct Materials Units) – Beginning Direct Materials Units = Required Direct Materials Purchases
Units ]. The budgeted cost of direct materials to be purchased is then computed by multiplying the required units of
direct materials by the anticipated cost per unit. The desired ending inventory is a critical component in the budgeting
process because inadequate inventories could result in temporary shutdowns of production.

Myriad Company
Direct Labor Budget (4)
For the Year Ending December 31, 2018

Quarter
1 2 3 4 Year

Units to be produced 3,100 3,600 4,100 4,600 15,400

Direct labor time per unit (hours) *2 *2 *2 *2 *2
Total required direct labor hours 6,200 7,200 8,200 9,200 30,800
Direct labor cost per hour (P) 10 10 10 10 10
Total direct labor cost P62,000 P72,000 P82,000 P92,000 P308,000
====================================
Notes:
Like the direct materials budget, the direct labor budget contains the quantity (hours) and cost of direct labor
necessary to meet production requirements. Direct labor hours are determined from the production budget.

Myriad Company
Manufacturing Overhead Budget (5)
For the Year Ending December 31, 2018

Quarter
1 2 3 4 Year

Variable costs
Indirect materials P 6,200 P7,200 P8,200 P9,200 P30,000
Indirect labor 8,680 10,080 11,480 12,880 43,120
Utilities 2,480 2,880 3,280 3,680 12,320
Maintenance 1,240 1,440 1,640 1,840 6,160
Total P18,600 P21,600 P24,600 P27,600 P92,400____
Fixed costs
Supervisory salaries P20,000 P20,000 P20,000 P20,000 P80,000
Depreciation 3,800 3,800 3,800 3,800 15,200
Property, taxes and insurance 9,000 9,000 9,000 9,000 36,000
Maintenance 5,700 5,700 5,700 5,700 22,800
Total P38,500 P38,500 P38,500 P38,500 P154,0000_____

Total manufacturing overhead P57,100 P60,100 P63,100 P66,100 P 246,400

====================================
Direct labor hours 6,200 7,200 8,200 9,200 30,800
====================================

Manufacturing overhead rate per direct labor hour ( P246,000 ÷ 30,800 ) P 8.00
=======

Notes:
The manufacturing overhead budget shows the expected manufacturing overhead costs for the budget period.
The budget prepared above distinguishes between variable and fixed overhead costs. For Myriad Company, it expects
variable costs to fluctuate with production volume on the basis of rates per direct labor hour given (P 1.00 for indirect
materials, P 1.40 for indirect labor, P 0.40 for utilities, and P 0.20 for maintenance). Thus, for 6,200 direct labor
hours, budgeted indirect materials are P 6,200 (6,200 x P 1.00), and budgeted indirect labor is P 8,680 (6,200 x
P 1.40). The company also recognizes that some maintenance is fixed. The amounts reported for fixed costs are 2
 Myriad Company
Selling and Administrative Expense Budget (6)
For the Year Ending December 31, 2018

Quarter
1 2 3 4 Year

Variable expenses
Sales commissions P9,000 P10,500 P12,000 P13,500 P45,000
Freight-out ____3,000 3,500 __ 4,000 4,500 15,000
Total P12,000 P14,000 P16,000 P18,000 P60,000
Fixed expenses
Advertising P5,000 P5,000 P5,000 P5,000 P20,000
Sales salaries 15,000 15,000 15,000 15,000 60,000
Office salaries 7,500 7,500 7,500 7,500 30,000
Depreciation 1,000 1,000 1,000 1,000 4,000
Property taxes and insurance 1,500 1,500 1,500 1,500 6,000
Total P30,000 P30,000 P30,000 P30,000 P120,000

Total selling and administrative expenses P42,000 P44,000 P46,000 P48,000 P180,000
====================================

Notes:
The company combines its operating expenses into one budget, the selling and administrative expense budget.
This budget is a projection of anticipated selling and administrative expenses for the budget period. In this budget, as
in the preceding budget, expenses are classified as either variable or fixed. In this case, the variable expense rates per
unit of sales are sales commissions P 3.00, and freight-out of P 1.00. Variable expenses per quarter are based on
the unit sales projected in the sales budget. For example, sales in the first quarter are expected to be 3,000 units.
Thus, Sales Commissions Expense is P 9,000 (3,000 x P 3.00), and Freight-out is P 3,000 (3,000 x P 1.00). Fixed

Myriad Company
Budgeted Income Statement (7)
For the Year Ending December 31, 2018

Sales (based on the Sales Budget) P900,000

Cost of goods sold (15,000 x P 44.00) 660,000
Gross profit P240,000
Selling and administrative expenses (see the pertinent budget) 180,000
Income from operations 60,000
Interest expense 100
Income before income taxes P59,900
Income tax expense 12,000
Net income P 47,900
======
Notes:
The budgeted income statement is the important end-product in preparing operating budgets. This budget
indicates the expected profitability of operations for the budget period. Once established, the budgeted income
statement provides the basis for evaluating company performance. As you would expect, this budget is prepared from
the previous budgets. For example, to find the cost of goods sold, it is first necessary to determine the total unit cost of
producing one Dining-Ware as follows:

Cost of One Dining-Ware

Cost Element Quantity Unit Cost Total
Direct materials 2 pounds P 4.00 P 8.00
Direct labor 2 pounds P 10.00 P 20.00
Manufacturing overhead 2 hours P 8.00 P 16.00
Total unit cost P 44.00
====
All data for the statement are obtained from the indivisual operating budgets except the following: (1) interest

3
 Myriad Company
Cash Budget (8)
For the Year Ending December 31, 2018

Quarter
Assumption 1 2 3 4

Beginning cash balance 1 P 38,000 P 25,500 P 15,000 P 19,400

Add: Receipts
Collections from customers 2 P 168,000 P 198,000 P 228,000 P 258,000
Sale of securities 3 2,000 0 0 0
Total receipts P 170,000 P 198,000 P 228,000 P 258,000
Total available cash P 208,000 P 223,500 P 243,000 P 277,400
Less: Disbursements
Direct materials 4 P 23,200 P 27,200 P 31,200 P 35,200
Direct labor 5 62,000 72,000 82,000 92,000
Manufacturing overhead 6 53,300¹ 56,300 59,300 62,300
Selling and administrative expenses 6 41,000² 43,000 45,000 47,000
Purchase of truck 7 0 10,000 0 0
Income tax expense 8 3,000 3,000 3,000 3,000
Total disbursements P 182,500 P 211,500 P 220,500 P 239,500
Excess (deficiency) of available cash over disbursements P 25,500 P 12,000 P 22,500 P 37,900
Financing
Borrowings 0 3,000 0 0
Repayments – plus P 100 interest 9 0 0 3,100³
0
Ending cash balance P 25,500 P 15,000 P 19,400 P 37,900
==============================

Notes:
¹ P 57,100 – P 3,800 depreciation
² P 42,000 – P 1,000 depreciation

The cash budget shows anticipated cash flows. Because cash is so vital in a company, this budget is
considered to be the most important output in preparing financial budgets. The cash budget contains three sections
(cash receipts – includes expected receipts from the company’s principal source(s) of revenue such as cash sales and
collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and
proceeds from planned sales of investments, plant assets, and the company’s capital stock.; cash disbursements –
shows expected payments for direct materials, direct labor, manufacturing overhead, and selling and administrative
expenses. This section also includes projected payments for income taxes, dividends, investments, and plant assets;
and financing – shows expected borrowings and the repayment of the borrowed funds plus interest. This section is
needed when there is a cash deficiency or when the cash balance is below management’s minimum required balance.
Data in the cash budget must be prepared in sequence because the ending cash balance of one period becomes
the beginning cash balance for the next period. Data for preparing the cash budget are obtained from other budgets
and from information provided by management. In practice, cash budgets are often prepared for the year on a
monthly basis.

Schedule of Expected Collections from Customers:

Quarter
1 2 3 4
Accounts receivable, 12/31/2017 P 60,000
First quarter (P 180,000) 108,000 P 72,000
Second Quarter (P 210,000) 126,000 P 84,000
Third quarter 144,000 P 96,000
Fourth quarter 162,000
Total collections P 168,000 P 198,000 P 228,000 P 258,000
==============================

Schedule of Expected Payments for Direct Materials:

Quarter
1 2 3 4
Accounts payable, 12/31/2017 P 10,600 4
First quarter (P 180,000) 12,600 P 12,600
Second Quarter (P 210,000) 14,000 P 14,600
 Myriad Company
Cash Budget (8)
For the Year Ending December 31, 2018

Notes (continued):

Pro-forma:
Beginning cash balance P xxx
Add: Cash receipts (Itemized) xxx
Total available cash P xxx
Less: Cash disbursements (Itemized) xxx
Excess (deficiency) of available cash over cash disbursements P xxx
Financing xxx
Ending cash balance P xxx
===
³ The budget indicates that P 3,000 of financing will be needed in the second quarter to maintain a minimum
cash balance of P 15,000. Since there is an excess of available cash over disbursements of P 22,500 at the end
of the third quarter, the borrowing is repaid in this quarter plus P 100 interest.

Myriad Company
Budgeted Balance Sheet (9)
December 31, 2018

Assets

Cash P 37,900
Accounts receivable 108,000
Finished goods inventory 44,000
Raw materials inventory 4,080
Buildings and equipment P 192,000
Less: Accumulated depreciation 48,000 144,000
Total Assets P 337,980
======
Liabilities and Shareholders’ Equity

Accounts payable P 18,600

Common stock 225,000
Retained earnings 94,380
Total Liabilities and Shareholders’ Equity P 337,980
======

Notes:
The budgeted balance sheet is a projection of financial position at the end of the budget period. This budget is
developed from the budgeted balance sheet for the preceding year and the budgets for the current year.

The computations and sources of the amounts are explained below:

Cash – Ending cash balance P37,900, shown in the cash budget

Accounts receivable – 40% of fourth quarter sales P 270,000, shown in the schedule of expected collections
from customers

Finished goods inventory – Desired ending inventory 1,000 units, shown in production budget

Raw materials inventory – Desired ending inventory 1,020 pounds, times the cost per pound P 4, shown in the
direct materials budget

Buildings and equipment – December 31, 2017, balance P 182,000, plus purchase of truck for P 10,000 5

Accumulated depreciation – December 31, 2017, balance P 28,800, plus P 15,200 depreciation shown in