Master Budgeting Quiz Problems and Solutions

I.

TS Lumber sells lumber and general building supplies to building contractors in a medium-sized town in
Ormoc. Data regarding the store's operations follow:

• Sales are budgeted at P350,000 for November, P320,000 for December, and P300,000 for
January.
• Collections are expected to be 90% in the month of sale, 8% in the month following the sale, and
2% uncollectible.
• The cost of goods sold is 75% of sales.
• The company purchases 60% of its merchandise in the month prior to the month of sale and 40%
in the month of sale. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are P24,700.
• Monthly depreciation is P16,000.
• Ignore taxes.

Statement of Financial Position

October 31

Assets:
Cash P 19,000
Accounts receivable (net of allowance for uncollectible accounts)
77,000
Inventory 157,500
Property, plant and equipment (net of P502,000 accumulated
depreciation) 1,002,000
Total assets P1,255,500

Liabilities and Stockholders’ Equity:

Accounts payable P 272,000
Common stock 780,000
Retained earnings 203,500
Total liabilities and stockholders’ equity P1,255,500

Required:
1. The net income for December would be?
2. The cash balance at the end of December would be?
3. The accounts receivable balance, net of uncollectible accounts, at the end of December would be?
4. Accounts payable at the end of December would be?
5. Retained earnings at the end of December would be?

Answer:
1. Sales 320,000 2. Cash bal. Nov. 1 19,000
COGS (240,000) A/R coll. 77,000
Gross Margin 80,000 Cash coll. 315,000 (350,000 x 90%)
Expenses (24,700) Cash avail. 411,000
Depreciation (16,000) A/P disbursements 272,000
39,300 A/P payments

2.
 II.

TS Inc. is working on its cash budget for March. The budgeted beginning cash balance is P33,000.
Budgeted cash receipts total P182,000 and budgeted cash disbursements total P191,000. The desired
ending cash balance is P40,000.

Required:
1. The excess (deficiency) of cash available over disbursements for March will be?
2. To attain its desired ending cash balance for March, the company needs to borrow?

III.

The TS Company, a merchandising firm, has budgeted its activity for December according to the
following information:

• Sales at P550,000, all for cash.

• Merchandise inventory on November 30 was P300,000.
• Budgeted depreciation for December is P35,000.
• The cash balance at December 1 was P25,000.
• Selling and administrative expenses are budgeted at P60,000 for December and are paid in cash.
• The planned merchandise inventory on December 31 is P270,000.
• The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are
paid for in cash.

Required:
1. The budgeted cash receipts for December are?
2. The budgeted cash disbursements for December are?
3. The budgeted net income for December is?

1.

IV.

TS Corporation makes and sells a single product called an Album. The company is in the process of
preparing its Selling and Administrative Expense Budget for the last quarter of the year. The following
budget data are available:

Variable Cost Monthly

Per Album Sold Fixed Cost
Sales commissions P5.90

Shipping P5.30

Advertising P8.90 P32,000

Executive salaries P178,000

Depreciation on office equipment P7,000

Other P0.60 P20,000

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

Required:
1. If the company has budgeted to sell 14,000 Albums in November, then the total budgeted selling
and administrative expenses for November would be?
2. If the company has budgeted to sell 12,000 Albums in December, then the budgeted total cash
disbursements for selling and administrative expenses for December would be?
3. If the budgeted cash disbursements for selling and administrative expenses for October total
P518,520, then how many Albums does the company plan to sell in October?

V.

TS Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter of the year. The
budgeted variable factory overhead rate is P1.70 per direct labor-hour; the budgeted fixed factory
overhead is P116,000 per month, of which P30,000 is factory depreciation.

Required:
1. If the budgeted direct labor time for October is 8,000 hours, then the total budgeted factory
overhead for October is?
2. If the budgeted direct labor time for November is 7,000 hours, then the total budgeted cash
disbursements for November must be?
3. If the budgeted direct labor time for December is 4,000 hours, then the predetermined factory
overhead per direct labor-hour for December would be?

VI.

Information on the actual sales and inventory purchases of the TS Company for the first quarter follow:

Sales Inventory Purchases

January P120,000 P60,000

February P100,000 P78,000
March P130,000 P90,000

Collections from TS Company's customers are normally 60% in the month of sale, 30% in the month
following sale, and 8% in the second month following sale. The balance is uncollectible. TS Company
takes full advantage of the 3% discount allowed on purchases paid for by the end of the following month.

The company expects sales in April of P150,000 and inventory purchases of P100,000. Selling and
administrative expenses for the month of April are expected to be P38,000, of which P15,000 is salaries
and P8,000 is depreciation. The remaining selling and administrative expenses are variable with respect to
the amount of sales. Those selling and administrative expenses requiring a cash outlay are paid for during
the month incurred. TS Company's cash balance on March 1 was P43,000, and on April 1 was P35,000.

Required:
1. The expected cash collections from customers during April would be?
2. The expected cash disbursements during April for inventory purchases would be?
3. The expected cash disbursements during April for selling and administrative expenses would be?
4. The expected cash balance on April 30 would be?

Problem 1

Webster Company has the following sales budget.

January P200,000
February P240,000
March P300,000
 April P360,000

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 P190,000. Webster has monthly fixed costs of
P30,000 including P6,000 depreciation. Fixed costs requiring cash are paid as incurred.

a. Compute budgeted cash receipts in March.

January February March April

200,000 240,000 300,000 360,000
January
200,000 x 40% 80,000
200,000 x 60% 120,000
February
240,000 x 40% 96,000
240,000 x 60% 144,000
March
300,000 x 40% 120,000
300,000 x 60% 180,000
Budgeted cash 264,000
receipts

b. Compute budgeted accounts receivable at the end of March. 300,000 x 60% = 180,000

c. Compute budgeted inventory at the end of February. 300,000 x 70% x 2 = 420,000

d. Compute budgeted purchases in February.

January February March
140,000 168,000 210,000
(200,000 x 70%) (240,000 x 70%) (300,000 x 70%)

Add: desired 336,000 420,000 504,000

ending inventory (240,000 x 70% x 2) (300,000 x 70% x 2) (360,000 x 70% x 2)
Total Needs 476,000 588,000 714,000
Less: beginning 190,000 336,000 420,000
inventory
286,000 252,000

e. March purchases are P290,000. Compute budgeted cash payments in March to suppliers of goods.
(252,000 x 20%) + (290,000 x 80%) = 282,400

f. Compute budgeted accounts payable for goods at the end of February.

252,000 x 20% = 50,400

g. Cash at the end of February is P45,000. 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.

Beg. cash balance 45,000

Add: cash coll. 264,000
Total cash avail. 309,000
Less: cash disb.
Materials 282,400
Fixed costs 24,000 (30,000-6,000)
Excess 2,600

Fill in the blanks.

1. Randall Co. makes payments for purchases 30% during the month of purchase and the remainder the
following month. April purchases are projected to be P80,000; May purchases will be P120,000.
The accounts payable balance on May 31 will be 120,000 x 70%= 84,000

2. Andover Inc. has projected sales to be: February, P10,000; March, P9,000; April, P8,000; May,
P10,000; and June, P11,000. 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

February March April May June

10,000 9,000 8,000 10,000 11,000
70% credit 7,000 6,300 5,600 7,000 6,700
sales
February
7,000 x 40% 2,800
7,000 x 55% 3,850
March
6,300 x 40% 2,520
6,300 x 55% 3,465
April
5,600 x 40% 2,240
5,600 x 55% 3,080
Cash sales 3,000 2,700 2,400 3,000 4,295
8,705

3. Holmgren estimates its supplies purchases to be P21,000 in August and P28,000 in September.
Holmgren pays 70% of its accounts in the month of purchase with the remainder paid the
following month. September payments would be ________.

August September
21,000 28,000
August
21,000 x 70% 14,700
21,000 x 30% 6,300
September
28,000 x 70% 19,600
25,900

4. 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

May June July August

1,000 x 3 1,200 x 3 1,300 x 3 1,600 x
3
3,000 3,600 3,900 4,800
Add: 1,800 1950 2,400
desired (3,600 x 50%) (3,900 x 50%) (4,800 x 50%)
end. Inv.
Total 4,800 5,550 6,300
 Needs
Less: beg. 1,800 1,950
Inv.
Purchases 8,250

5. Hayward Company desires an ending inventory of P70,000. It expects sales of P400,000 and has a
beginning inventory of P65,000. Cost of sales is 65% of sales. Budgeted purchases are 400,000
x 65%= 260,000 + 70,000 - 65,000= P265,000

Encircle the correct answer.

1. 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.
d. usually reduces the need to prepare a cash budget.

2. 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.

3. 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.

4. 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.

5. 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.
b. Production for next month.
c. Cash receipts for next month.
d. Inventory at the end of this month.

6. If a company is earning a profit,

a. its cash balance is increasing.
b. its monthly cash disbursements will be stable.
c. its inventory is increasing.
d. it might have to borrow money.

7. 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.

8. Inventory policy is most critical in the budgeting of

a. sales.
b. cost of goods sold.
c. purchases.
d. expenses.

9. 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.

10. The type of company most likely to run short of cash during the year is one with
a. little seasonality.
b. high contribution margin percentage.
c. high seasonality and rapid sales growth.
d. relatively low fixed costs.