[AEAIS9]: [Strategic Cost Management]

Unit 2 - Part 2
Assessment
Jay Christian D. Garcia
Affiliation 1; jaychristiangarcia18@gmail.com
Correspondence: Janet Jardin (Classroom) • brosia459@gmail.com

Instructor: Ms. Janet Jardin

Date Submitted: 14 February 2024

Part IV – The Master Budget Exercises

Discussion Questions:

1. Define the term budget. How are budgets used in planning?

➢ A budget is a financial plan that outlines expected revenues and expenses over a specific period.
Budgets are used in planning by setting financial goals, allocating resources, forecasting future
performance, evaluating actual performance, aiding decision-making, controlling costs, and
facilitating communication within organizations. They are essential tools for managing finances
effectively and achieving strategic objectives.

2. Define control. How are budgets used to control?

➢ Control involves monitoring performance against predetermined standards and taking corrective
action when necessary. Budgets are used for control by providing benchmarks for comparison,
analyzing variances, identifying problems early on, controlling costs, and evaluating performance.
They enable organizations to manage resources effectively and ensure that goals are achieved
efficiently.
3. What is a master budget? An operating budget? A financial budget?

➢ Master Budget: Comprehensive financial plan integrating all operational and financial aspects for a
specific period.
➢ Operating Budget: Focuses on day-to-day operational activities, detailing expected revenues and
expenses.

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➢ Financial Budget: Concentrates on financial aspects, including cash flow, capital expenditures, and
projected financial statements.

In summary, the master budget encompasses both operational and financial budgets, providing a
complete overview of a company's financial plan and activities.
4. All budgets depend on the sales budget. Is this true? Explain.

➢ Yes, it's true that all budgets typically depend on the sales budget. The sales budget serves as a
foundational component because it provides the initial estimate of the revenue that a company
expects to generate during a specific period. In essence, the sales budget serves as a starting
point for creating other budgets within an organization. It provides the basis for estimating revenues
and drives the allocation of resources across various departments to support sales targets and
overall business objectives.

5. Why is it important for a manager to receive frequent feedback on his or her performance?

➢ It's important for managers to receive frequent feedback on their performance because it:

​ a. Facilitates continuous improvement by highlighting strengths and areas for

development.
​ b. Ensures alignment with organizational goals and expectations.
​ c. Enhances employee engagement and motivation.
​ d. Helps identify and address problems early on.
​ e. Builds trust and fosters positive relationships.
​ f. Supports professional development and skill enhancement.
​ g. Boosts retention and morale within the team.
6. A budget too easily achieved will lead to diminished performance. Do you agree? Explain.

➢ An easily achievable budget can lead to diminished performance due to a lack of challenge,
potential stagnation, missed opportunities, decreased engagement, underutilization of resources,
and the development of a culture of mediocrity. Challenging yet realistic goals encourage
motivation, innovation, and a culture of high performance within the organization.

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Exercises:

1. Preparing a Sales Budget

Patrick Inc. sells industrial solvents in five-gallon drums. Patrick expects the following units to be
sold in the first three months of the coming year.
January 41,000
February 38,000
March 50,000
Answer:
1 2 3 Total
Units 41,000 38,000 50,000 129,000
Unit selling price x P35 x P35 x P35 x P35
Budgeted Sales P1,435,000 P1,330,000 P1,750,000 P4,515,000

2. Preparing a Production Budget

Patrick Inc. makes industrial solvents. In the first four months of the coming year, Patrick expects the
following unit sales:
January 41,000
February 38,000
March 50,000
April 51,000
Answer:
Patrick Inc.
Production Budget
Quarter
Jan Feb Mar Quarter
Sales in units 41,000 38,000 50,000 129,000
Desired ending inventory 9,500 12,500 12,750 34,750
Total needs 50,500 50,500 62,750 163,750

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Less: Beginning inventory (6,700) (9,500) (12,500) (28,400)

Units to be produced 43,800 41,000 50,250 135,350

3. Preparing a Direct Materials Purchases Budget

Patrick Inc. makes industrial solvent sold in five-gallon drums. Planned production in units for the first three months of
the coming year is:
January 43,800
February 41,000
March 50,250
Answer:

Patrick Inc.
Direct Material Purchases Budget
For the Year Ended December 31, 20
Gallons of chemical Quarter

1 2 Year
Units to be produced 43,800 41,000 84,800
Direct materials per unit x 5.5 x 5.5 x 5.5
Production needs 240,900 225,500 466,400
Desired ending inventory 33,825 41,456 75,291
Total needs 274,725 266,956 541,681
Less: Beginning inventory (36,135) (33,835) (69,970)
Direct materials to be purchased 238,590 233,131 471,721
Cost gallon of chemical x P2 x P2 x P2
Total Purchase cost plain t-shirts P477,180 P466,262 P943,442

Plastic drum 1 2 Year

Units to be produced 43,800 41,000 84,800
Direct materials per unit x1 x1 x1
Production needs 43,800 41,000 84,800
Desired ending inventory 6,150 7,538 13,688
Total needs 49,950 48,538 98,488
Less: Beginning Inventory (6,570) (6,150) (12,720)
Direct materials to be purchased 43,380 42,388 85,768
Cost per plastic drum x P1.60 x P1.60 x P1.60
Total Purchase cost of ink P69,408 P67,821 P137,229

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Total direct materials purchase cost P546,588 P454,063 P1,080,671

4. Preparing a Direct Labor Budget

Patrick Inc. makes industrial solvents. Planned production in units for the first three months of the coming year is:

January 43,800
February 41,000
March 50,250
Answer:
Patrick Inc.
Direct Labor Budget
For The Year Ended December 31, 2020
Quarter
1 2 3 Total
Units to be produced 43,800 41,000 50,250 135,050
Direct labor time per unit in hours X 0.3 X 0.3 X 0.3 X 0.3
Total hours needed 13,140 12,300 15,075 40,515
Average wage per hour X P18 X P18 X P18 X P18
Total direct labor cost P236,520 P221,400 P271,350 P729,270

5. Preparing an Overhead Budget

Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first three months of the coming year are:
January 13,140
February 12,300
March 15,075

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Answer:
Patrick Inc.
Overhead Budget
For the 1st Quarter
Quarter
January February March Year
Budgeted direct labor hours 13,140 12,300 15,075 40,515
Variable overhead rate X P0.70 X P0.70 X P0.70 X P0.70
Budgeted variable overhead P9,198 P8,610 P10,553 P28,361
Budgeted fixed overhead* 2,750 2,750 2,750 8,250
Total overhead P11,948 P11,360 P13,303 P36,611

6. Preparing an Ending Finished Goods Inventory Budget

Andrew Company manufactures a line of office chairs. Each chair takes P14 of direct materials and uses 1.9 direct
labor hours at P16 per direct labor hour. The variable overhead rate is P1.20 per direct labor hour and the fixed
overhead rate is P1.60 per direct labor hour. Andrews expects to have 675 chairs in the ending inventory. There is no
beginning inventory of office chairs.
Answer:
a. Direct materials P14
Direct Labor (1.9 @ P16) 30.4
Overhead:
Variable (1.9 @ P1.20) 2.28
Fixed (1.9 x P1.60) 3.04
Total Unit Cost P49.72

b. Ending Finished Goods Inventory Budget

Andrew Company
Ending Finished Goods Inventory Budget
Logo t-shirts 675
Unit Cost X P49.72
Total ending inventory P 33,561

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7. Preparing a Cost of Goods Sold Budget

Andrews Company manufactures a line of office chairs. Each chair takes P14 of direct materials and uses 1.9 direct
labor hours at P16 per direct labor hour. The variable overhead rate is P1.20 per direct labor hour and the fixed
overhead rate is P1.60 per direct labor hour. Andrews expects to produce 20,000 chairs next year and expects to
have 675 chare in ending inventory. There is no beginning inventory of office chairs. Prepare a cost of goods sold
budget for Andrews Company.
Answer:
Product cost
DM - P14
DL - P30.40
VOH - 2.28
FOH - 3.04
Product Cost = P49.72
COGS = Beg + New - End = 0 + 20,000 - 675 = 19,325

Andrews Company
Cost of Goods Sold Budget
Direct materials used P280,000
Direct labor used 608,000
Overhead 106,400
Budgeted manufacturing costs P994,400
Beginning finished goods 0
Cost of goods available for sale P994,400
Less: Ending finished goods (33,561)
Budgeted cost of goods sold P960,839

8. Preparing a Selling and Administrative Expenses Budget

Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of P19,730,000. There
is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following:
Salaries P960,000
Utilities 365,000
Office space 230,000

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Advertising 1,200,000
Answer:
Year
Total variable expenses P591,900
Fixed S&A expenses
Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000
Total fixed expenses
Total S&A expenses P3,346,900

9. Preparing a Budgeted Income Statement

Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of P19,730,000. There
is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following:
Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000
Answer:
Oliver Company
Budgeted Income Statement
For the Year Ended
Sales P1,728,000
Less: Cost of Goods Sold (1,008,000)
Gross margin P720,000
Less: Variable S&A expenses (176,000)
Fixed S&A expenses (423,000)
Income before income taxes 121,000
Less: Income taxes (121,000 x 35%) (42,350)

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Net income P78,650

10. Preparing a schedule of Cash Collection on Accouonts

Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of P19,730,000. There
is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following:
Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000
Answer:
Source August September
Receive on account from:
May
June 25,200
July 38,500 19,250
August 17,360 43,400
September 18,200

11. Preparing an Accounts Payable Schedule

Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of P19,730,000. There
is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following:
Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000
Answer:
Source May June
Cash needed for payments:
April 299,520
May 82,240 328,960
June 83,200

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Total cash needed P381,760 P412,160

12. La Famiglia Pizzeria provided the following information for the month of October:
a. Sales are budgeted to be P157,000. About 85% of sales are cash; the remainder are on account.
b. La Famiglia expects that, on average, 70% of credit sales will be paid in the month of sale, and 28 will
be paid in the following month.
c. Food and supplies purchases, all on account, are expected to be P116,000. La Famiglia pays 25% in the
month of purchase and 75% in the month following purchase.
d. Most of the work is done by the owners, who typically withdraw P6,000 a month from the business as
their salary. (Note: The P6,000 is a payment in total to the two owners, not per person.) Various
part-time workers cost P7,300 per month. They are paid for their work weekly, so on average 90% of
their wages are paid in the month incurred and the remaining 10% in the next month.
e. Utilities average P5,950 per month. Rent on the building is P4,100 per month.
f. Insurance is paid quarterly; the next payment of P1,200 is due in October.
g. September sales were P181,500 and purchases of food and supplies in September equalled P130,000.
h. The cash balance on October 1 is P2,147.
Answer:
a. Source October
Cash sales P133,450
Received on account from:
Month of sale 16,485
September 15,246
_____________
Total cash receipts P165,181

b. Cash payment P29,000 + P97,500 = P126,500

c.

Year

Beginning cash balance P2,147

Cash sales and collections on account: 165,181

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Total cash available P167,328

Less disbursements
Payments for:
Raw material P(126,181)
Owner’s withdrawal (6,000)
Worker’s salary (7,300)
Utilities (5,950)
Rent (4,100)
Insurance (1,200)
Total disbursements P(150,731)
Ending cash balance P16,597

13. Select Operational Budgets

Joven Products produces coat racks. The projected sales for the first quarter of the coming year and the beginning
and ending inventory data are as follows:
Unit Sales 100,000
Unit Price P 15
Units in beginning inventory 8,000
Units in targeted ending inventory 12,000
Answer:
a. Sales

Joven Products

Sales Budget
For the First Quarter
Units 100,000
Unit Price x P15
Sales P1,500,000

b. Production Budget

Joven Products
Production Budget
For the First Quarter

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Sales (in units) 100,000

Desired ending inventory 12,000
Total needs 112,100
Less: Beginning Inventory 8,000
Units to be produced 104,000

c. Direct Materials Purchase Budget

Joven Products
Direct Materials Purchases Budget
For the First Quarter
Units to be produced 104,000
Direct materials per unit (lb.) 12,000
Production needs (lb.) 416,000
Desired ending inventory (lb.) 6,000
Total needs (lb.) 422,000
Less: Beginning inventory (lb.) 4,000
Materials to be purchased (lb.) 418,000
Cost per pound X P2.50
Total purchase cost P1,045,000

d. Direct Labor Budget

Joven Products
Direct Labor Budget
For the First Quarter
Units to be produced 104,000
Labor hours per unit X 0.5
Total hours needed 52,000
Cost per hour X P9
Total direct labor cost P468,000

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14. Cash Budgeting

Kylles Inc. expects to receive cash from sales of P45,000 in March. In addition, Kylles expects to sell
property worth P3,500. Payments for materials and supplies are expected to total P10,000, direct labor
payroll will be P12,500, and other expenditures are budgeted at P14,900. On March 1, the cash account
balance is P1,230.
Answer:
a.

Kylles Inc.
Cash Budget for the Month of March
Beginning cash balance 1, 230
Cash sales 45,000
Sale of property 3,500
Total cash available P49,730
Less disbursements:
Materials and supplies P10,000
Direct labor payroll 12,500
Other expenditures 14,900
Total disbursements P37,400
Ending cash balance P12,330

b. Unadjusted ending balance P12,330

Plus borrowing 3,000
Adjusted ending balance P15,330

In April, interest owed would be (1/12 x 0.12 x P3,000) = P30.

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