PROBABILITY ANALYSIS EXERCISES: BUDGETING. 1. Production & Inventory Budget India Company has budgeted sales at P_100,000 and expects a profit of (0%) of the sales. Expenses are estimated as follows: selling = 12% of sales; administrative = 8% of sales. Labor is expected to be 40% of a total manufacturing costs, Factory overhead is to he applied at 75% of direct labor costs. Inventories Dies, eg Bee im ' Tals" pacar st Sai am ‘Se ao Ome 308 L Materials , Workin-process sca 13/000 a Mee ‘goods 7/500 2500 “ nequnet ‘Det ithe budgeted amount for: Wang CE ) ‘A) Cost of goods sold 70,00 0 ©) Factory-overhead 22,600 My 6,001 8) Total manufacturing cost "©0000 0) Materials purchases 7000 ooo x Sales & Accounts Receivable Budget Past collections experienced by South Africa Company indicate that 60% of the sales billed in a month are collected during the month of sales, 20% are collected in the following month, and 10% are collected in the second following month. The following are the projected sales far next year’ cam ~ go january February Nit ~40°/ rch P 500,000 MA -0/- “prt » 530,000 ® © vgege May — P 600,000 REQUIRED: Determine the budgeted amounts for the following: 'A) March callections WOO ©) AR balance as Box 8) May collections” © D) AR balance as of 3. Merchandise Purchases Budget has budgeted the follow for the Slguarter a8 ® ® - rch See 5 Soty April 123,500 aG000 se ss Ee Tse, es Bee | ows v ®pe0 Sentamberdine 208,200 10,000 “Other ae, estimates arcr fall merchandises are to sell at its invoice cost plus 30% mark-up. Beginning inventories are budgeted at @0% of the same 5 so +. 03} of merchandise purchases are paid i the purchase month, while balance is paid the,next month REQUIRED: Determine the projected amount for: AS ‘A) Merchandise purchases in April 2022 C) Total payment in May 2022 for merchandise purchases B) Merchandise purchases in May 2022 4. Pro-forma Statement of Cash Flows Philippines Company presents these data to be used as bacis for the pro-forma Statement of Cash Flows ‘O4) Customer sales receipts for P 980,000 F2) Purchase of machinery and equipment for P 240,000 cash 3) payment of dividends of P 345,000. ©4) Settlement of income taxes of P 125,000 £5) Sale ofinvestment securities for P 500,000. \6) Receipt of rentals of P 110,000. 7) 9 of shares of common stock for P 250,000. Oa) ‘of P 90,000 due to suppliers and payroll to employees. © 9) Parehase of land for{plant site|or P 400,000 cos that was borrowed from a bank F 10) Payment of P 350,000 for treasury shares. REQUIRED: Determine the projected amounts of the folic wing: ‘A)_ Net cash provided by OpstatIg activities 876,000 C)_ Net cash used in financing activities (4,000) B) Net cash used in investing activities Tseia00) D) Net cash increase or deetease 1640 000, 5. Expected Value France Company prepared the following probability distribution describing the relative likelihood of monthly sales volume levels and related profit (loss) for its lone product that sells for P 50 per unit: Sales volume Probability Profit (Loss) 6,000 G00 10% (P 70,000) G.000 12,000 7400 30% 10,006 4.000 18,000 2409 20% 60,000 1.000 24,000 7.0¥ 30: 100,000 20,008 30,000 _?:000 10% 145,000 4,000 REQUIRED: Using the expected value app: 2,009 'A)_ How much is the budgeted sales for the month? 400,000 =U@,000 #€D. B) What is the expected value of the monthly profit? £2,000 Page 2 of 10 (0915-2303213 * www.resacpareview.com6. Indifference Point under Probability Analysis ee ee neat ee meee es xn nverent EG) 14 see ES ae ae eeecerin a acer ye ooaaeee failure, net cash inflow is estimated samy @: Cras aaee eS REQUIRED: See Oe ae ay A). Ifthe success rate iX70%) what isthe value of act “to invel ion a. OD nay 40). e B) What probability-percentéges should be assigned to the events ‘success’ and ‘failure’ indifferent between the two actions “to invest” and “not to invest?” ag'/. suaess > Goi: gail 7. Joint Probability Zolombia Company has theag sales departments, each contributing the following percentages of total sales: Alcohol, 6095; Beverages,(S03); and Cigars,(20%) Each department has had the following everage annual ee. Tate: AlcoROH? 10%, Beversge=-12%, and Cigars, 5%. A random corporate sudit has found 2 weekly damaged goods rate of sufficient magnitude to alarm Colombia's management. REQUIRED. Determine the probability. in pergents the damage occurred in the: See Meee cyean many nomen B) Beverages department Go/- COP £24 ©) Cigars department 107, CWAK Th 8. Decision Tree 186,000 Awine maker must decide whether to harvest grapes nuw or in four weeks. Harvesting now will yield 100,000 inns cold oltics of wing. netting P'2 per bottle. If the wine giaker waits Tor four weeks and weather tums ol (probability: oh trey yield will be cut in half but net(P 3 ber bottle. If the weather does not turn cold, the (ie depends orrrain, With rain (probabilley: 50%), 2 YE yield netting P 4 per bottle will result. Without Yorn there wil stil be a fll 100,000-bottle veld, but the net amount will be P 3 per bottle only. REQUIRED. Determine the optimal expected value. 210,000 onan sete tier — 410,000 (g0,00v+ 20,000) Now} __ 109.000 _ci0.00042) COLD ( 10 }: 110.000 _ (0.00043) J W/- =30,000 . LATER] a RAIN (F ): 400,000 (100,00048) 300.01) >on (4 weexs) CO (aI 210,000 EP. NO (¢o/. ): _ 200,000.400000F 3) xD, 010 ee 0 xen =t 9. Decision (Payoff) Table FO,00' B Puerto Rico Dealers \s contemplating on how many units of Gato order to meet the customer demands for the month based on the following projection: Demand Probability ‘unit 10% unit 50% Zumts 40% ‘Te proft for each unit sold is B 200,000 while the carrying cost for each esl ne is P 40,000 REQUIRED. . How many units of cars should Puerto Rico order and why? 2 hecwig iF will give the OPTIONS 08 (Decision Alternatives) {0 unit (10%) *StockOunit [0 Stock 1 unit | + Stock 2 units [ units (40%) | Expected Value bee i ga0208 6.000 Wore? 232,000 10. Perfect Information ‘Assume that Puerto Rico Dealers in No. 9 would maximize profits if the company were able to obtain additional information that can determine exactly what all potential customers intended to do for this month (i.e., Puerto Rico has perfect information). REQUIRED’ ‘A) What is the expected value with perfect information? 140,000 B) What is the expected value of perfect information? 2 oo ©). What maximum amount is Puerto Rico willing fo pay for the additional information? 2®.S00 a Page 3 of 10 0715-7505215 + www.resacparéiew? com” Wee1 10. an 12 13, 14, 15, 16. WRAP-UP EXERCISE: In a typical planning process, which of the following would be completed last? a. Vision and mission c. Tactical goals b. Strategic objectives d Operational plans In the budgeting process, top management ‘a. Should only be involved in the approval process b. Needs to be involved, including using the budget process to communicate goals . Lacks the detailed knowledge of the daily operations and should limit their involvement d. Need to separate the budgeting process and business planning process into two separate processes Coordinating the preparation of budget is the responsibility assigned to which of the following? a. Top management Accounting department b. Budget committee 4. Lower levels of management eB a ‘Which is an advantage of authoritative budgeting over participative budgeting? ova taht “Op a. Longer time cycle in the budgeting process poriuperi —-botton: b. Stronger commitment from lower level of management LU ded ©. Greater flow of information from bottom to top management d. More emphasis on strategic plans and avoidance of budgetary slacks ‘An extra cushion built into the budget to protect against unexpected results which normally involves over- budgeting (padding) expenses and under-budgeting revenues to make the budget targets easier to meet. ‘2. Budgetary slack ©. Continuous budgeting ©. Tactical planning Management by objectives Which is usually perceived as being the master budget’s greatest aduantage to management? 2. Increased communication © Performance analysis . Increase coordination a Required planning ‘The starting point in preparing a comprehensive master budget is a. Cash budget c. Budgeted income statement >. Production budget 4. Sales forecast ‘The production budget process usually begins with the 2. Sales budget ©. Direct materials budget : b. Direct labor budget 4. Manufacturing overhead budget Which of these budgets is usually prepared first? ’@. Production budget Cash disbursements budget b. Materials purchases budget d. Ca : All of the following are considered operating budgets, ' D._ Sales budget 4. Production budget Using “expected value” as a forecasting method means that the sales forecast to be used is 2. Based on probabilities €. Developed based on managers’ expectation b. Based on expected selling price ._The sum of sales expected by all departments Canada, has projected sales to be P_80,000 in April. P 300,000 in May and P 120,000 in June. Canada the second month following the sale. What is the accounts receivable balance on June 307.78 a, P-92,000 «20,000 0,000 b. P 72,000 d._ Some other number 2.00 Indonesia, Inc. has project February, P 10,000; March, P 9,000; Apri, P.8,000; May, R.10,000: id June, P 11,000. Indonesi Greyash Sales Shd 00% Salas Ga account Accounts are collected In the month following the sale ama@sdp PBllacted "he second month. What would be the total ash receipts in May? 3.000 ‘a. P3,000 . P8,705 3a b. P8,150 d. Some other number ~$ Australia Company Venezuela pays for pays for the remaining @o 5 HFEHaSBS for June to be P $30,000 and its purchases for July to be P 124,000 is pureriases ig the month of purchase and receives a 2% discount. Australia in the next month without discount. For qurchases only, what are the expected cash payments iiJuly? Pe Tar, 2. P 123,920 & Pp 124,912 £21000 b. P 124,400 d. 7 127,392 124, 07 Japan Co. has projected GaleSyfo be P 60,000 in Janugry, P 78,000 in February, and P 80,000 in Marci Japan wants to have @5%pFriext monthve sales needs on hand at theend of a month. jp ey If Japan has an averade Gross profit of 40%) what are the February Rmsauacd. “ae ‘a. -P 30,500 cP 46,250 (1000) b. P.45,750 d. P 76,250 7,000 Brazil Co. is preparing its cash budget for the next month based on the following projections: Sates P 409,000) 490,990 ~ es Gross Profit Rate 25% ‘ es Incréase wo Inventories” < #30,000° 2 A 3 cc Page 5 of 10 (0915.2503213 « www.resacpareview.com ‘Vietnam Company manufactures a single product. The company keeps inventary of raw materials eo of the coming month's budgeted production. Each unit of product reauirs f materials. The production budget is GIrunits)= May. 1-000; une, 1,200; July, 1,300; August, 1,600. Wer, Determine the Ge natenaidGurthadis oi) my oh. M8 ‘a. 1,450 pounds => 3,900 pounds © “74 feo. 2D b. 2,400 pounds 4,359 pounds meer has budgeted sales of 24,000 finished units for 1 fortncoming@rynth period. It of direct materials to make oae.finished umt Given the following: Fi takes a iS Direct Materials (pounds) 22.0008F@ Beginning inventory 14,000 44,000 2 Target ending inventory 12,000 48,000 €8B.000, ius 88,006 aks ; How many pounds of direct materials should be budgeted for during th Sjont period? a. 88,000 «96,000 b. 92,000 €. 100,000 Mexico, Inc. has pre lexible budget formula Sorproduction casts: costs = 250,000 + 4X, where es Terie ofan iSeleaelishaaien|practoe 402,500) nits af 8 total cost of 350,000, fat is the variance oF actual costs from budgeted costs (J.c., budget variance)? 3¢Dit up.000 + 4(ince a. P'50,000 favorable ©. P 100,000 favorable 400,990 UDrw+ &TD;00 b. P-50,000 unfavorable ¢. P 100,200 unfavorable €,900U 00,000 The use of standard costs in the budgeting process sigrifies that an organization has most likely implemented a a. Capital budget c. Zero-based budget b. Flexible budget d. Static budget SELF-TEST QUESTIONS - with suagested answers (Sources: CUNCINRPCPAVAIC?AVarious test barks) Which of the following is NOT an advantage of budgeting? ‘2. Tt requires managers to state their objectives. b. It fecitates control by permitting comparisons of budgeted and actual results. It facilitates performance evaluation by comparing budgets with actual results. 4d. Tk provides a check-up device that allows managers to kep close tabs on their subordinates. ‘Budgets are a necessary component of financial decision making because they provide a (n) '2. Efficient allocation of resources Means to check managerial discretion b. Means to use all the firm's resources d. Automatic corrective mechanism for errors Which of the following is true of master budgets? ‘a. They aid in quantifying the expectations of ail stakeholders. b. They must be administered rigidly after they are committed to. They aid in coordinating what needs to be dane to implement a plan. 4d. They include only financial aspects of a plan and oxclude nonfinancial aspect. “To assure better management acceptance, flow of input data for budgeting should begin in which area? ‘a. Top management Accounting department b. Budget committee d. Lower levels of mangement In an organization that plans by using comprehensive budceting, tne master budget is ‘2. Acompilation of all the separate operational and financial budget schedules of the organization b. The booklet containing budget guidelines, polices and forms to use in the budgeting process c. _ The current budget updated for operations for part of the current year d. A budget for a non-profit entity after itis approved by the appropriate authoritative body ‘The sales budget is classified as @. financial budget © An operating budgst b. A flexible budget ri. A program budget ‘Ohio Company developed the following sales forecasts and associated probabilities. What isthe expected value of sales? ‘a. P 650,000 b. P-670,000 .P.800,000 i ‘Colorado Company desires an ending inventory of P 69, expects sales of P 120,000. a hhas a beginning inventory te = 989 a (of P 40,000. Cost of sales is 60% of sales. Budi are a ‘a. P-60,000 92,000 40. b. P72,000 dF 132,009 72,000 Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the direct labor budget would be the 2. Sales forecast Schedule o: cash receipts and disbursements b. Raw materials purchases budget dL Production budget110. New Mexico Company plans to sell 24,000 units of Product A in July and 30,000 units in August. Product A deainy ne were 25000 units. Post experience has shown that efd-ot-moath inventory must equaK3,000 brits plus SSS tte nemo sales On une vs remuromen wes me Easdon ar ta, han mary UES! Prost rust be rng the month of Jy? ae ogra a pan =n &. 22200 a. 25,800 in June? 21,525 pounds b. 2/500 pounds 12, New Jersey Co. is budgeting 4 kalos of chemical Z5. Dur finished goods inventory of keeps nvntr of rished goods aR the the coming month’s budgeted (én needs. Each unit of product requires 2 nounds-of materials. The oat in nts: May, 1,000; June, 1,200; July, 1,300; Aust, 1,600. What woud ke Ze raw pater 2 ns by es and inventory of raw materials Le < amopane 8, MRE 4. 330 punts 5,050) 7200, hinge. bt sales of 53,000 units of product Ai for 2022, The manufacture of ene unit of Al requires 2022, Ne Jers pans to sede the inventory o 25 by 50,000 es and nese the At by 600 uns, Tere sr mornrcene Retry. How many hos of 25s New Jersey budgeting to purchase in 20227 c ‘a. 138,000 b. 162,000 186,000 d. 238,000 13, Washington Company has the folowing 2022 budget data Beginning finished goods inventory 40,000 units Sales 70,000 units Ending finished goods inventory 30,000 units Direct materials P10 per unit Direct labor P20 per unt Variable factory overhead PS per unit Fixed factory overhead P 80,000, ‘What are the 2022 total budgeted production costs? 8 a. P 2,100,000

92,000 17. Nebraska Company, 2 merchandising firm, is preparing its master budget and has gathered the following data to help budget cash disbursements: Cost of goods sold P 1,680,000 Desired decrease in inventories 70,000 Desired decrease in accounts payable 150,000 {All of the accounts payables are for inventory purchases and all inventories are purchased on account. What are the ‘estimated cash disbursements for inventories for the budget period? > a. P 1,460,000 1,900,000 bP 1,600,000 d._P 1,760,000 18. Alabama Consortium is constructing a corporate planning model.’ Cash sales are 30% of the company's sales, with the ‘remainder subject to the folowing collection pattern: If Syis defined as total sales ‘One month after sale 60% ‘Two months after sale 30% Three months after sale 8% Uncollectible 2% In month °n,’ which one of the following expressions correctly describes Alabama's collection, ‘on account in any given month? c a 06S ei +03 Sq 2+ 0.08 S n3 © 42S m1 40.21 Snr + 0.056 S np B. 0.42S nes + 0.21 Sne2 + 0.056 Sena d. 0.6Sn1+03 Sno 40.08 Sima -0.02 5 Page 6 of 10 (0915-2303215 » www.resacpaféview.com‘tems 19 and 20 are based on the following inforination ‘Operational budgets are used for planning and controling its business activities. Data regarding a company’s sales for the last 6 months of the year and its projected collection pattems are shown below: Forecasted sales uly 775,000, August September October November December “Types of sales ‘Gash sales 20% Credit sales 80% Sal In the month of sale 40% In the first month following the sale 57% Uncollectibie 3% “The cast of merchandise averages 40% of ts selling price. The company’s policy is to maintain an inventory equal to 25% of the next month's forecasted sales. The inventory balance at cust is P 80,000 as of June 30. 19, The budgeted cost of the company's purchases for the month of August would be c a. P 302,500 cc. P307,500 b. 305,000 dP 318,750 20. The company's total cash receipts from sales and collectons on account that would be budgeted for the month of September would be 8 ‘a. 757,500 . P793,800 b. P771,000 a. P56,500 21. The cash receipts budget includes > @. Funded depreciation &_ Extinguishment of debt b. Operating supplies d. Loan proceeds 22, The Pennsylvania Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable: Estimated credit sales for May 200,000 ‘Actual credit sales for April 150,000, Estimated collections in May for credit sales in May. 20% Estimated collections in May for credit sales in Apr 70% Estimated collections in May for credit sales prior to April P 12,000 Estimated write-offs in May for uncollectible credit sales 8,000 Estimated provision for bad debts in May for credit sales in May 7,000 What are the estimated cash receipts from accounts receivable collections in May? ° a P 142,000 <9 150,000 b. P 149,000 6. P 157,000 23, Which one of the following budgets's the last item to be prepared under a normal budget preparation process? g ‘a. Direct labor budget < Gsh budget b. Cost of goods sold budget ¢. Manulacturing overhead budget 24, The cash budget should help to ensure 8 ’2. That enough cash is on hand at all times to satisty maximum cash requirements . Sufficient liquidity without an excess amount of idle cash c.That cash dividends can be paid every quarter ‘4. That sufficient cash is available to pay salaries, even if it means borrowing the money 25, The cash budget for 2022 would be affected in some way by al! of the folowing, except 8 a. Acash dividend declared in 2021 for payment in 2022. b.Acash dividend declared in 2022 for payment in 2073. c. Interest expense on loans taken aut and repaid during 2 d. The sales forecast for the frst month in 2023. 26. Acompany has prepared a cash budget for January through June of 2022. Which of the following, discovered in February 2022, is LEAST likely to require revising the cash Dudget? . ‘a. February sales are lower than budaeted. . The interest rate on short-term borrowing is higher than budaeted. The company increased from 10% to 20% the down payment it requires from customers. d. The company changed inventory methods from LIFO to FIFO. 27. The last pro forma statement prepared under a typical budgeting process is the ic ‘a. Income statement Statement of cash flows 'b. Statement of cost of goods sold dd. _ Statement of manufacturing costs 28. tn the preparation of a cash budget with clear-cut information on sources and uses of funds, all of the following would classified as a cash flow under investing activities, EXCEPT: > ’2. Collection of a loan from subsidiary c. Sale of plant assets b. Purchase of a patent from an inventor 4. Dividends received on stock investment Page 7 of 10 0915-2303213 + www resacpareview.com29. In the preparation of a cash budget with clear-cut information on sources and uses of funds, all of the following would classified as a cash flow under financing activities, EXCEPT: A ‘2. The conversion of the company's own preferred stock into common stock b. The declaration and payment of a cash dividend on the company's own common stock The repayment of principal on a mortgage 4. The sale of the company's own preferred stock for cash 30. North Carolina projects the following activities related to its financial operations: Issuance of shares of company’s own common stock: P 170,000 Dividends to be paid to the company’s own shareholders: P 7,000 Dividends to be received from investments in other companies’ shares: P 4,000 Interest to be paid on the company’s own bonds: # 11,000 Repayment of principal on the company’s own bonds: P 40,000 Proceeds from sale of the company’s used equipment: P 27,000 Jn cash financial budget, the net cash used by financing activities should be projected to be 8 375,000 cP 112,000 b. P 123,000 4. P 19,000) 31. The budget that describes the long-term position, goals, and objectives of an entity is the > 2. Capital budget c Gash management budget b. Operating budget . Strategic budget 32. ‘The budgeting process should be one that motivates managers and employees to work toward organizational goals. Which one of the following is LEAST likely to motivate managers? B ‘2. Participation by subordinates in the budgetary process b. Having top management set budget levels c. _ Use of management by exception 4d. Holding subordinates accountable for the items they contro! 33. Comparing actual results with a budget based on achieved (actual) volume is possible with the use of 2 D 2. Monthly budget c.Rolling budget b. Master budget d. Flexible budget 34. Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes next year? 8 a. Static budgeting © Top-down budgeting b. Flexible budgeting dd. Life-rycle budgeting 35. A flexible budget is 8 ‘2. One that can be changed whenever a manager so dzsires. b. Adjusted to reflect expected costs at the actual level of actvity c_One that uses the formula ‘total cost = cost per unit x units produced” d._ The same as a continuous budget. 36. Which of the following isa difference between a static budget and a flexible budget? c 2. flexible budget indudes only variable costs; a static budget includes onty fixed costs. . A flexible budget includes all costs; a static budget includes only fixed costs. cAflexible budget gives allowances for different levels of activity while a static budget does net. d. None of the above. 37. A company has developed the budget formula below for estimating is shipping expenses. Shipments have historically averaged 12 pounds per shipment. Shipping costs = P 18,000 + (P 2.60 x pounds shipped) ‘The planned and actual activity regarding orders and shipments for the month are given in the following schedule: Pian Actual Sales orders 800 780, Shipments 300 820 Units shipped 8,000 9,000 Sales P 120,000 P 144,000, ‘Total pounds shipped 9,600 12,500 “The actual shipping costs for the month amounted to P 21,000. What shouid be the appropriate monthiy flexible budget. allowance for shipping costs for the purpose of performance evaluation?” > 2. P 18,000 © P23,760 b. P 18,492 4. 25,500 38. The difference between the actual amounts and the flexible busiget arcounts for the actual output achieved is the 8 ‘&. Production volume variance Sales volume variance b. Flexible budget variance d. Standard cost variance 3. “Kaizen budgeting refers to the budgeting proces whore ‘The budget is based on only one level of activity ‘The budget is based on many levels of activity so that budqet may be adjusted based on actual activity “The budget is based not on the existing system, but on changes or improvements that are to be made AA product's revenues and expenses are estimated over its entire life cycle (i.e., from R&D phase to customer support phase) 40. The budget method that maintains a constant twelve-month planning horizon by adding a new month on the end as the current month is completed is called pose c 2. An operating budget A continuous budget B.A capital budget 3 Amaster budget Page 8 of 10 (O915-2303213 * www.resacpareview.com Ses