CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
MAS 9010
MANAGEMENT ADVISORY SERVICES

OPERATING AND FINANCIAL BUDGETING

BUDGET – a plan expressed in quantitative terms, on how to acquire and use the resources of an
entity during a budget period a certain future period of time.

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.
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.
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.

THE BUDGET COMMITTEE – usually composed of the sales manager, production manager, chief
engineer, treasurer, and controller.

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.

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 – 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.
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-
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 2 of 17

examination of all costs in the hope that some can be reduced or

eliminated.
Life-cycle Budget – estimates a product’s 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.
VALUE CHAIN: R & D – design – production – marketing – distribution – customer
service.
Activity-based Budgeting – applies activity-based costing principles to budgeting
Kaizen Budgeting – assumes the continuous improvement of products and processes,
usually by way of many small innovations rather than major changes; it
incorporates expectations for continuous improvement into budgetary
estimates.

EXERCISES IN BUDGETING

1. Carson, Inc., produces office supplies, including pencils. Pencils are bundled in packages; each
package sells for P20. The sales budget for the first four months of the year follows for this
product.
Unit Sales
January 100,000
February 120,000
March 110,000
April 100,000

Company policy requires that ending inventories for each month be 10 percent of next
month’s sales. However, due to greater sales in December than anticipated, the ending
inventory of pencils for that month is only 5,000 packages.

REQUIRED:
Prepare a production budget for the first quarter of the year. Show the number of units
that should be produced each month as well as for the quarter in total.

January February March Total

Sales 100,000 120,000 110,000 330,000
Add desired ending inventory 12,000 11,000 10,000 10,000
Total needs 112,000 131,000 120,000 340,000
Less: Beginning inventory 5,000 12,000 11,000 5,000
Units to be produced 107,000 119,000 109,000 335,000

2. Manning Company produces a variety of labels, including iron-on name labels, which are sold
to parents of camp-bound children. (The camps require campers to have their name on every
article of clothing.) Each roll consists of 10 yards of paper strip with 500 copies of the child’s
name. Each yard of paper strip costs P2. Manning has budgeted production of the label rolls
for the next four months as follows:
March April May June
Rolls in units 6,000 9,000 15,000 10,000

Inventory policy requires that sufficient paper strip be in ending monthly inventory to satisfy
25 percent of the following month’s production needs. The inventory of paper strip at the
beginning of March equals exactly the amount needed to satisfy the inventory policy.

REQUIRED:
1. Prepare a direct materials purchases budget for March, April, and May showing
purchases in units and in pesos for each month and in total.
2. Each roll of labels produced requires (on average) 0.05 direct labor hour. The average
cost of direct labor is P60 per hour. Prepare a direct labor budget for March, April, and
May showing the hours needed and the direct labor cost for each month and in total.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 3 of 17

March April May Total

Units to be produced 6,000 9,000 15,000 30,000
Direct materials per unit (yards) × 10 × 10 × 10 × 10
Production needs 60,000 90,000 150,000 300,000
Desired ending inventory (yards) [25% next month] 22,500 37,500 25,000 25,000
Total needs 82,500 127,500 175,000 325,000
Less beginning inventory 15,000 22,500 37,500 15,000
Direct materials to be purchased (yards) 67,500 105,000 137,500 310,000
Cost per yard × P2 × P2 × P2 × P2
Total purchase cost P135,000 P210,000 P275,000 P620,000

March April May Total

Units to be produced 6,000 9,000 15,000 30,000
Direct labor time per unit (hours) × 0.05 × 0.05 × 0.05 × 0.05
Total hours needed 300 450 750 1,500
Cost per hour × P60 × P60 × P60 × P60
Total direct labor cost P18,000 P27,000 P45,000 P90,000

3. The production budget of a corporation for the upcoming fiscal year is as follows:

1Q 2Q 3Q 4Q
Budgeted production in units 2,000 2,050 2,125 1,950

Each unit requires four (4) hours of direct labor. The company’s variable manufacturing
overhead rate is P5 per direct labor hour and the company’s fixed manufacturing overhead is
P50,000 per quarter. The only non-cash item included in fixed manufacturing overhead is
depreciation, which is P20,000 per quarter.

REQUIRED: 1. Construct the company’s manufacturing overhead budget for the upcoming
fiscal year.

Total budgeted overhead Q1 – P90,000; Q2 – P91,000; Q3 – 92,500; Q4 – 89,000; Year – P362,500

2. Compute the company’s manufacturing overhead rate (including both variable

and fixed manufacturing overhead) for the upcoming fiscal year. Round off to
the nearest whole cent. P362,500 ÷ 32,500 = P11.16

4. I/S Inc., a one-product mail-order firm, buys its product for P75 per unit and sells it for P140
per unit. The sales staff receives a 10% commission on the sale of each unit. Its March income
statement follows.
I/S INC.
Income Statement
For Month Ended March 31, 2016
Sales . . . . . . . . . . . . . . . . . . . . . . . . P1,400,000
Cost of goods sold . . . . . . . . . . . . . 750,000
Gross profit . . . . . . . . . . . . . . . . . . P 650,000
Expenses
Sales commissions (10%) . . . . . . . 140,000
Advertising . . . . . . . . . . . . . . . . . 215,000
Store rent . . . . . . . . . . . . . . . . . . 26,000
Administrative salaries . . . . . . . . . 42,000
Depreciation . . . . . . . . . . . . . . . . 52,000
Other expenses . . . . . . . . . . . . . . 13,000
Total expenses . . . . . . . . . . . . . . . P 488,000
Net income . . . . . . . . . . . . . . . . . . . P 162,000

Management expects March’s results to be repeated in April, May, and June of 2016 without
any changes in strategy. Management, however, has an alternative plan. It believes that unit
sales will increase at a rate of 10% each month for the next three months (beginning with
April) if the item’s selling price is reduced to P130 per unit and advertising expenses are
increased by 20% and remain at that level for all three months. The cost of its product will
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 4 of 17

remain at P75 per unit, the sales staff will continue to earn a 10% commission, and the
remaining expenses will stay the same.

REQUIRED:
Prepare budgeted income statements for each of the months of April, May, and June that
show the expected results from implementing the proposed changes. Use a three-column
format, with one column for each month. Net Income – April P71,000; May P117,200; June P168,020

5. The balance sheet for Araullo, Inc. at December 31, 200A is as follows:
Assets Liabilities and Equity
Cash P 90,000 Accounts payable P 80,000
Accounts receivable 120,000 Capital stock 300,000
Inventory 130,000 Retained earnings 310,000
Property, plant and equipment, net 350,000
Total assets P690,000 Total liabilities & equity P690,000

For the year 200B, cash receipts are estimated at P860,000, representing collection of
accounts receivable. Cash payments are budgeted at P830,000. Included in these payments
is P150,000 for various expenses that do not flow through accounts payable. Credits for the
accounts payable for the year are estimated at P740,000, all merchandise purchases. All cash
payments are for expenses or purchases. Depreciation expense is P60,000. Net sales are
estimated at P1,200,000. The inventory of merchandise is expected to increase to P150,000
by the end of the year. Income tax is estimated at 30 percent and will be paid after December
31, 200B.

REQUIRED: From the information given, prepare a budgeted balance sheet at December 31,
200B. Prove the retained earnings balance by computing the net income.

Net profit = P189,000

Assets: Liabilities and Equity:
Cash P 120,000 Accounts payable P 140,000
Accounts receivable 460,000 Capital stock 300,000
Inventory 150,000 Retained earnings 499,000
Property, plant and equipment, net 290,000 Income tax payable 81,000
Total assets P1,020,000 Total liabilities & equity P1,020,000

6. Lawrence, Inc., found that about 20 percent of its sales during the month were for cash.
Lawrence has the following accounts receivable payment experience:

Percent paid in the month of sale 40%

Percent paid in the month after the sale 50%
Percent paid in the second month after the sale 8%

Lawrence’s anticipated sales for the next few months are

April P240,000
May 288,000
June 276,000
July 295,000
August 300,000

REQUIRED: Prepare a cash receipts budget for July and August.

Credit sales in May = P288,000 x 0.8 = P230,400

Credit sales in June = P276,000 x 0.8 = P220,800
Credit sales in July = P295,000 x 0.8 = P236,000
Credit sales in August = P300,000 X 0.8 = P240,000
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 5 of 17

July August
Cash sales 59,000 60,000
Collection of accounts receivable:
From May credit sales (0.08 x P230,400) 18,432 ---
From June credit sales (0.50 x P220,800) 110,400
(0.08 x P220,800) 17,664
From July credit sales (0.40 x P236,000) 94,400
(0.50 x P236,000) 118,000
From August credit sales (0.40 x P240,000) --- 96,000
Cash receipts P282,232 P291,664

7. A company is preparing its budget for the upcoming fiscal year. Management has prepared
the following summary of its budgeted cash flows:
1Q 2Q 3Q 4Q
Total cash receipts P180,000 P330,000 P210,000 P230,000
Total cash disbursements P260,000 P230,000 P220,000 P240,000

The company’s beginning cash balance for the upcoming fiscal year will be P20,000. The
company requires a minimum cash balance of P10,000 and may borrow any amount needed
from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at
the beginning of any quarter and may repay its loans, or any part of it, at the end of any
quarter. Interest payments are due on any principal at the time it is repaid. For simplicity,
assume the interest is not compounded.

REQUIRED: Prepare the company’s cash budget for the upcoming fiscal year.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year

Cash bal. beginning P 20,000 P 10,000 P 35,800 P 25,800 P 20,000
Total cash receipts 180,000 330,000 210,000 230,000 950,000
Total cash available 200,000 340,000 245,800 255,800 970,000
Less total disbursements 260,000 230,000 220,000 240,000 950,000
Excess (deficiency) (60,000) 110,000 25,800 15,800 20,000
Financing:
Borrowings (beg. of qtr.) 70,000 70,000
Repayments (end of qtr.) (70,000) (70,000)
Interest (70,000x 3%x2) _______ (4,200) _______ ________ (4,200)
Total financing 70,000 (74,200) _______ ________ (4,200)
Cash balance, ending P10,000 P35,800 P 25,800 P 15,800 P 15,800

8. The following information was available from Pera Corporation’s books:

200B Purchases Sales
July P4,000 P 8,000
August 5,000 9,000
September 6,000 7,000
October 7,000 10,000

Collections from customers are normally 80% in the month of sale, 10% in the month
following the sale, and 8% in the second month following the sale. The balance is expected to
be uncollectible. Pera takes full advantage of the 2% discount allowed on purchases paid for
by the tenth of the following month. Purchases for November are budgeted at P4,000, while
sales for November are forecasted at P6,000. Operating expenses are expected to be P6,000
for the month of November, inclusive of P1,000 depreciation expense. Pera’s cash balance at
November 1 was P5,000.

REQUIRED: Prepare the following schedules:

1. Expected cash collections during November. 4,800+1,000+560 = 6,360
2. Expected cash disbursements during November. (7,000x98%) + 5,000 = 11,860
3. Expected cash balance at November 30. 5,000+6,360-11,860 = (500)
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 6 of 17

9. Smiley FS Company is a wholesale distributor of electronic dental braces. The company’s

balance sheet as of April 30 is given below:
Assets
Cash P 9,000
Accounts receivable, customers 54,000
Inventory 30,000
Buildings, equipment, net of depreciation 207,000
Total assets P300,000
Liabilities and Stockholders’ Equity
Accounts payable, suppliers P 63,000
Note payable 14,500
Capital stock, no par 180,000
Retained earnings 42,500
Total liabilities and stockholders’ equity P300,000

The company is in the process of preparing budget data for May. A number of budget items have
already been prepared, as stated below:
a. Sales are budgeted at P200,000 for May. Of these sales, P60,000 will be for cash; the
remainder will be credit sales. One-half of a month’s credit sales are collected in the
month the sales are made, and the remainder is collected in the following month. All the
April 30 receivables will be collected in May.
b. Purchases of inventory are expected to total P120,000 during May. These purchases
will all be on account. Forty percent of all purchases are paid for in the month of
purchase, the remainder is paid in the following month. All the April 30 accounts
payable to suppliers will be paid during May.
c. The May 31 inventory balance is budgeted at P40,000.
d. Operating expenses for May are budgeted at P72,000, exclusive of depreciation.
These expenses will be paid in cash. Depreciation is budgeted at P2,000 for the
month.
e. The note payable on the April 30 balance sheet will be paid in May, with P100 in
interest. (All the interest relates to May).
f. New refrigerating equipment costing P6,500 will be purchased for cash in June.
g. During May, the company will borrow P20,000 from its bank by giving a new note
payable to the bank for that amount. The new note will be due in one year.

REQUIRED: 1. Prepare a cash budget for May. Support your budget with schedules
showing budgeted cash receipts from sales and budgeted cash payments for
inventory purchases. Balance May 31 = P15,400
2. Prepare a budgeted income statement for May. Use the traditional income
statement format. Net income = P15,900
3. Prepare a budgeted balance sheet as of May 31.

Cash P 15,400 Accounts payable P 72,000

Accts receivable 70,000 Notes payable 20,000
Inventory 40,000 Common stocks 180,000
PPE 205,000 Retained earnings 58,400
Total P330,400 Total P330,400

– END –
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 7 of 17

SELF TEST
THEORY

1. A distinction between forecasting and planning

A. Is not valid because they are synonyms.
B. Arise because forecasting covers the short term and planning does not.
C. Is that forecasts are used in planning.
D. Is that forecasting is a management activity, whereas planning is a technical activity.

2. The use of budgetary slack does not allow the preparer to

A. Be flexible under unexpected circumstances.
B. Project actual expenses.
C. Increase the probability of achieving budgeted performance.
D. Use the budget to control subordinate performance.

3. For better management acceptance, the flow of data to be used for budgeting should begin with
A. Accounting department C. Lower levels of management
B. Top management D. Budget committee

4. The budgeting technique that is most likely to motivate managers is

A. Top-down budgeting. C. Program budgeting and review technique.
B. Zero-base budgeting. D. Bottom-up budgeting.

5. The budget that describes the long-term position, goals, and objectives of an entity within its
environment is the
A. Capital budget. C. Cash management budget.
B. Operating budget. D. Strategic budget.

6. A budget that identifies revenues and costs with an individual controlling their incurrence is
A. Master budget C. Responsibility budget
B. Product budget D. None of the above.

7. Which one of the following is not considered to be a benefit of participative budgeting?

A. Individuals at all organizational levels are recognized as being part of the team, this results
in greater support of the organization.
B. The budget estimates are prepared by those in direct contact with various activities.
C. Managers are held responsible for reaching their goals, and they cannot shift their
responsibility by blaming the unrealistic goals demanded by the budget.
D. When managers set the final targets for the budget, top management need not be
concerned with the overall profitability of current operations.

8. An advantage of incremental budgeting when compared with zero-based budgeting is that

incremental budgeting
A. Encourages adopting new projects quickly.
B. Accepts the existing base as being satisfactory.
C. Eliminates functions and duties that have outlived their usefulness.
D. Eliminates the need to review all functions periodically to obtain optimum use of resources.

9. In zero-based budgeting, which of the following statements are True?

1. All activities in the company are organized into break-up units called packages.
2. All costs have to be justified every budgeting period.
3. The process is not time consuming since justification of costs can be done as a routine
matter.
A. All three statements. C. Statement 1 only.
B. Statements 1 and 2 only. D. Statement 2 and 3 only.

10. A continuous (rolling) budget

A. Presents planned activities for a period but does not present a firm commitment.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 8 of 17

B. Presents the plan for only one level of activity and does not adjust to changes in the level
of activity.
C. Presents the plan for a range of activity so that the plan can be adjusted to changes in
activity.
D. Drops the current month or quarter and adds a future month or quarter as the current
month or quarter is completed.

11. In an organization that plans by using comprehensive budgeting, the master budget is
A. A compilation of all the separate operational and financial budget schedules of the
organization.
B. The booklet containing budget guidelines, policies, and forms to use in the budgeting
process.
C. The current budget updated for operations for part of the current year.
D. A budget of a not-for-profit organization after it is approved by the appropriate
authoritative body.

12. For a company that does not have resource limitations in what sequence would the budgets be
prepared?
1. cash budget 4. production budgets
2. sales budget 5. purchase budgets
3. inventory budgets
A. sequence 2, 3, 4, 5 and 1 C. sequence 2, 4, 3, 5 and 1
B. sequence 2, 3, 4,1 and 5 D sequence 4, 3, 2, 1 and 5

13. The foundation of a profit plan is the

A. Capital budget. C. Cost and expense budget.
B. Sales forecast. D. Production plan.

14. Which one of the following is a sales forecasting technique that can be utilized in preparing the
annual profit plan?
A. Linear programming. C. Queuing theory.
B. Exponential smoothing. D. Standard costing.

15. The budget that is usually the most difficult to forecast is the
A. Production budget. C. Sales budget.
B. Expense budget. D. Manufacturing overhead budget.

16. Which one of the following may be considered an independent item in the preparation of the
master budget?
A. Ending inventory budget. C. Pro form income statement.
B. Capital investment budget. D. Pro forma statement of financial position.

17. The use of the master budget throughout the year as a constant comparison with actual results
signifies that the master budget is also a
A. Flexible budget. C. Zero-base budget
B. Capital budget. D. Static budget.

18. Which budget is most likely to facilitate variance analysis?

A. Fixed budget. C. Static budget.
B. Continuous budget. D. Flexible budget.

19. Which one of the following statements regarding the difference between a flexible budget and a
static budget is correct?
A. A flexible budget primarily is prepared for planning purposes while a static budget is
prepared for performance evaluation.
B. A flexible budget provides cost allowances for different levels of activity whereas a static
budget provides costs for one level of activity.
C. A flexible budget includes only variable costs whereas a static budget includes only fixed
costs.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 9 of 17

D. A flexible budget is established by operating management while a static budget is

determined by top management.

20. OChan Company has decided to implement a new departmental budgeting system. Previously,
OChan had merely prepared company-wide budgets. The most likely behavioral result of the
change is that
A. Employees will welcome the improved control.
B. Participation in the budgeting process will lower managers' morale because of the increased
responsibility.
C. Considerable resistance to the change will occur.
D. Informal groups will be unaffected.

PROBLEMS

QUESTIONS 1 AND 2 ARE BASED ON THE FOLLOWING INFORMATION.

Sta. Barbara is one of the manufacturers of a part used in the production of a popular consumer
product. Sales of the consumer product in 2020 are estimated at 5,000,000 units. Sta. Barbara
regularly supplies 40% of the parts used in the new products. Two parts units are needed for
each product unit. Aside from the new products, there is also a replacement parts market.
Over the past three years, the company has sold the following number of replacement parts:
2018 300,000
2019 330,000
2020 363,000
This trend is expected to continue. The parts are sold for P4 per piece in the new products
market and P4.50 in the replacement parts market.

1. The estimated number of parts to be sold by Sta. Barbara in 2020 is

a. 2,399,300 b. 4,000,000 c. 4,399,300 d. 4,435,600

2. The amount of expected revenue based on the estimated number of parts to be sold in 2020 is
a. P9,796,850 b. P16,000,000 c. P17,597,200 d. P17,796,850

3. Beatless Corp, plans to sell 200,000 units of Let-It-Be product in July and anticipate a growth in
sales of 5% per month. The target ending inventory in units of the product is 80% of the next
month’s estimated sales. There are 150,000 units in inventory as of the end of June. The
production requirement in units of Let-It-Be for the quarter ending September 30 would be
a. 670,560 b. 691,525 c. 665,720 d. 675,925

QUESTIONS 4 AND 5 ARE BASED ON THE FOLLOWING INFORMATION.

Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box.
Projected sales in units for the next 5 months are as follows:

Month Projected Sales in Units

January 30,000
February 36,000
March 33,000
April 40,000
May 29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at P3.50 per
rabbit. Voice boxes are purchased from another supplier at P1.00 each. Assembly labor cost is
P2.00 per rabbit, and variable overhead cost is P0.50 per rabbit. Fixed manufacturing overhead
applicable to rabbit production is P12,000 per month. Daffy’s policy is to manufacture 1.5 times
the coming month’s projected sales every other month, starting with January (i.e, odd-
numbered months) for February sales, and to manufacture 0.5 times the coming month’s
projected sales in alternate months (i.e., even-numbered months) This allows Daffy to allocate
limited manufacturing resources to other products as needed during the even-numbered
months.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 10 of 17

4. The unit production budget for animated rabbits for January is

a. 45,000 units. b. 16,500 units. c. 54,000 units. d. 14,500 units.

5. The peso production budget for animated rabbits for February is

a. P327,000 b. P390,000 c. P113,500 d. P127,500

6. Next month’s budgeted sales for TEMP is 18,000 units. Each unit of product TEMP uses 6
kilograms of raw materials. The production and inventory budgets for June 2022 are as follows:

Opening Inventory Planned Ending Inventory

Raw materials 21,000 kgs. 24,400 kgs.
Finished goods 15,000 units 11,400 units

During the production process, it is usually found that 10% of production units are scrapped as
defective and this loss occurs after the raw materials have been placed in process.
What will the raw material purchases be in June?
a. 89,800 kgs. b. 96,000 kgs. c. 98,440 kgs. d. 99,400 kgs.

7. Atlantic Co. used P200,000 of direct materials during June. At June 30, Atlantic's direct materials
inventory was P30,000 more than it was at June 1. What were Atlantic's direct materials
purchases during June?
A. P30,000 B. P170,000 C. P200,000 D. P230,000

8. A company has budgeted sales for the upcoming quarter as follows:

January February March
Units 15,000 18,000 16,500

The ending finished goods inventory for each month equals 50% of the next month’s budgeted
sales. Additionally, three pounds of raw materials are required for each finished unit produced.
The ending raw materials inventory for each month equals 200% of the next month’s production
requirements. If the raw materials cost P4.00 per pound and must be paid for in the month
purchased, the budgeted raw materials purchases (in pesos) for January are
a. P216,000 b. P207,000 c. P198,000 d. P180,000

QUESTIONS 9 AND 10 ARE BASED ON THE FOLLOWING INFORMATION.

A company produces a product that requires 2 pounds of a raw material. It is forecast that
there will be 6,000 pounds of raw materials on hand at the end of June. At the end of any given
month, the company wishes to have 30% of next month’s raw material requirements on hand.
The company has budgeted production of the product for July, August, September, and October
to be 10,000, 12,000, 13,000 and 11,000 units, respectively. As of June 1, the raw material
sells for P1.00 per pound.

9. The cost of inventory is determined using the last-in-first-out (LIFO) method. If the price of raw
material increases 10% as of June 30, what will be the effect of this increase on the cost of
purchases from July to September?
a. P600 increase. c. P9,160 increase.
b. P7,060 increase. d. P60 increase.

10. In the month of September, raw material purchases and ending inventory, respectively, will be
(in pounds):
a. 24,800 and 6,600 c. 13,000 and 3,900
b. 32,600 and 6,600 d. 28,600 and 6,600

11. Each unit of product ZIM takes five direct labor hours to make. Quality standards are high and
8% of units produced are normally rejected due to substandard quality. Next month’s budgets
are as follows:
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 11 of 17

Beginning inventory of finished goods 3,000 units

Planned ending inventory of finished goods 7,600 units
Budgeted sales of ZIM 36,800 units

All stocks of finished goods must have successfully passed the quality control check. What is the
direct labor budget for the month?
a. 198,720 hours b. 200,000 hours c. 223,500 hours d. 225,000 hours

12. Tropical Manufacturing Corporation is using the following flexible-budget formula for annual
indirect labor cost
Total cost = P12,000 + P0.75 per machine hour

For the month of June, the operating budgets are based upon 10,000 hours of planned machine
time. Indirect labor costs included in this planning budget are
a. P7,500 b. P8,500 c. P17,500 d. P19,500

NUMBERS 13 AND 14 ARE BASED ON THE FOLLOWING DATA:

GLORIA CORP. has the following budget estimates for its second year of operations:

Projected sales – P3,500,000

Projected net income before tax – 12% of sales
Estimated selling and administrative expenses – 25% of sales
Direct labor and factory overhead are budgeted at 70% of the total manufacturing cost.

Inventories are estimated as follows:

Raw materials Goods in process Finished goods
Beginning P220,000 P250,000 P350,000
Ending 270,000 300,000 420,000

13. The estimated cost of goods sold would be

a. P2,275,000 b. P2,205,000 c. P2,325,000 d. P1,750,000

14. The estimated purchases of raw materials would be

a. P967,500 b. P732,500 c. P697,000 d. P747,500

QUESTIONS 15 AND 16 ARE BASED ON THE FOLLOWING INFORMATION.

Berol Company, which plans to sell 200,000 units of finished product in July and anticipates a
growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished
product is 80% of the next month's estimated sales. There are 150,000 finished units in
inventory on June 30.

Each unit of finished product requires 4 pounds of direct materials at a cost of P1.20 per pound.
There are 800,000 pounds of direct materials in inventory on June 30.

15. Berol Company's production requirement in units of finished product for the 3-month period
ending September 30 is
A. 712,025 units. B. 630,500 units. C. 638,000 units. D. 665,720 units.

16. Assume Berol Company plans to produce 600,000 units of finished product in the 3-month
period ending September 30, and to have direct materials inventory on hand at the end of the 3-
month period equal to 25% of the use in that period. The estimated cost of direct materials
purchases for the 3-month period ending September 30 is
A. P2,200,000. B. P2,400,000. C. P2,640,000. D. P2,880,000.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 12 of 17

QUESTIONS 17 THROUGH 19 ARE BASED ON THE FOLLOWING INFORMATION:

Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other
institutions. This table tops are manufactured by Rokat, but the table legs are purchased from
an outside supplier. The Assembly Department takes a manufactured table top and attaches the
four purchased table legs. It takes 20 minutes of labor to assemble a table. The company
follows a policy of producing enough tables to insure that 40% of next month’s sales are in the
finished goods inventory. Rokat also purchases sufficient raw materials to insure that raw
materials inventory is 60% of the following month’s scheduled production. Rokat’s sales budget
in units for the next quarter is as follows:
July 2,300
August 2,500
September 2,100

Rokat’s ending inventories in units for June 30, 2022 are

Finished goods 1,900
Raw materials (legs) 4,000

17. The number of tables to be produced during August 2022 is

a. 1,400 tables. b. 2,340 tables. c. 1,440 tables. d. 1,900 tables.

18. Disregarding your response to question 48, assume the required production for August and
September is 1,600 and 1,800 units, respectively, and the July 31, 2022, raw materials inventory
is 4,200 units. The number of table legs to be purchased in August is
a. 6,520 legs. b. 9,400 legs. c. 2,200 legs. d. 6,400 legs.

19. Assume that Rokat corporation will produce 1,800 units in the month of September 2022. How
many employees will be required for the Assembly Department? (Fractional employees are
acceptable since employees can be hired on a part-time basis. Assume a 40-hour week and a 4-
week month)
a. 15 employees. b. 3.75 employees. c. 60 employees. d. 600 employees.

20. Cook Co.’s total costs of operating five sales offices last year were P500,000, of which P70,000
represented fixed costs. Cook has determined that total costs are significantly influenced by the
number of sales offices operated. Last year’s costs and number of sales offices can be used as
the bases for predicting annual costs. What would be the budgeted cost for the coming year if
Cook were to operate seven sales offices?
a. P700,000 b. P672,000 c. P602,000 d. P586,000

21. It is budgeting time for Del Co. The following assumptions were agreed upon for the next year
after a strategic planning session which covered a five-year horizon
1. Sales is estimated to be at 70,000 units at its national selling price of P126.00. 75% of
total sales are on credit. 1.5% of net sales is provided for doubtful accounts.
2. Sales discounts are given to various customers at different rates and net to gross ratio is
at 93%
3. Mark-up on merchandise is at 45% of invoice cost. Beginning inventory is P80,900 and
is expected to be reduced by P15,000 at the end of the period.
4. Selling and administrative expenses is expected to be 15% of gross sales.
5. Depreciation is computed at P500,000.

The projected operating income for the year is

a. P252,741 b. P296,841 c. P252,341 d. P173,802

22. Juice Company budgeted P148,000 sales on account for June, P120,000 for July, P211,000 for
August, P198,000 for September, and P164,000 for October. Collection experience indicates that
60% of the budgeted sales will be collected the month after the sale, 36% will be collected the
second month, and 4% will be uncollectible. Which month should have the largest amount of
cash receipts from accounts receivable budgeted?
A. August. B. September. C. October. D. November.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 13 of 17

23. Philam Auto Clinic prepared the following estimates of sales for the next four months:

Cash sales Credit sales Total sales

November, 2016 P1,500 P18,000 P19,500
December, 2016 2,200 26,400 28,600
January, 2017 1,800 21,600 23,400
February, 2017 2,000 24,000 26,000

The Auto Clinic has the following collection pattern on credit sales: 10% in the month of sale;
30% in the month after sale: 50% in second month of sale; 10% uncollectible. What are the
budgeted cash receipts for the month of February 2017?
a. P21,080 b. P25,870 c. P25,880 d. P24,080

24. Pera Inc. prepared the following sales budget

Month Cash Sales Credit Sales
February P 80,000 P 340,000
March 100,000 400,000
April 90,000 370,000
May 120,000 460,000
June 110,000 380,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two
months following the sale. The remaining 5% is expected to be uncollectible. The company’s
total budgeted collection from April to June amounts to
a. P1,090,250 b. P1,325,500 c. P1,468,500 d. P1,397,500

25. In preparing its cash budget for July, 2022, Art Company made the following projections
Sales P1,500,000
Gross Profit 25%
Decrease in inventories P 70,000
Decrease in accounts payable for inventories 120,000

For July, 2022, what were the estimated cash disbursement for inventories?
a. P1,050,000. b. P1,055,000. c. P1,175,000. d. P 935,000.

26. Sta. Elena Merchandising Company plans to sell in December 15,000 units of its product at a
unit price of P20. The estimated gross profit is 25% of sales. The inventory will be increased in
December in anticipation of higher sales volume for Christmas. The increase will be about
P100,000. Amounts payable to trade creditors will also increase by P25,000. Estimate of
payment to be made during the month of December for merchandise is
a. P300,000 b. P250,000 c. P150,000 d. P100,000

27. The plan of Soriano Plastic Co. is to sell during the month of July 5,000 plastic bags at a unit
price of P35.00. The gross profit is estimated at 30% of sales income. It is also estimated that
the inventory will be increased by roughly P32,500 in anticipation of higher sales volume for the
school season. The amount payable to trade creditors will also increase by P55,000. What is
the estimated payments to be made during the month of July for the merchandise?
a. P100,000 b. P122,500 c. P140,000 d. P145,000

28. Buenaflor Products Company will sell during June 8,000 pieces of its merchandise at a unit price
of P30.00. It is estimated that the gross profit is 25% of sales revenue. The inventory will be
increased during the month by roughly P50,000 in expectation of higher sales volume for the
opening of the school year. The amounts due to trade creditors will also increase by P30,000.

The estimate of payments to be made during the month of June for merchandise is
a. P80,000 b. P180,000 c. P200,000 d. P240,000

29. JLT Corporation expects to sell 150,000 units during the first quarter of 2022, with an ending
inventory for the quarter of 20,000 units. Variable manufacturing costs are budgeted at P50 per
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 14 of 17

unit, with 70% of total variable manufacturing costs requiring cash payments during the quarter.
Fixed manufacturing costs are budgeted at P120,000 per quarter, 40% of which are expected to
require cash payment during the quarter.

In the cash budget, payments for manufacturing costs during the quarter will total
a. P8,500,000 b. P5,950,000 c. P5,998,000 d. P5,298,000

30. A company is preparing its cash budget for the coming month. All sales are made on account.
Given the following:
Beginning Balance Budgeted Amounts
Cash P 50,000
Accounts receivable 180,000
Sales P800,000
Cash disbursements 780,000
Depreciation 25,000
Ending accounts receivable 210,000
balance
What is the expected cash balance of the company at the end of the coming month?
a. P15,000 b. P40,000 c. P45,000 d. P70,000

31. Digna Company had the following transactions in 2022, their first year of operations
Sales (90% collected in 2022) P1,500,000
Bad debts write-offs 60,000
Disbursements for cost and expenses 1,200,000
Disbursement for income taxes 90,000
Purchase of fixed assets 400,000
Depreciation of fixed assets 80,000
Proceeds from issuance of common stock 500,000
Proceeds from short-term borrowings 100,000
Payments on short-term borrowings 50,000

What is the cash balance at December 31, 2022?

a. P210,000. b. P150,000. c. P280,000. d. P170,000.

QUESTIONS 32 THROUGH 34 ARE BASED ON THE FOLLOWING INFORMATION.

Data obtained from the January 31 balance sheet of Doromal Co. are as follows:

Cash P 16,000 Accounts payable P165,000

A/R net of allowance for
bad debts, (P14,000) 76,000
Inventory 32,000 Common stock 100,000
Plant & equipment – net Retained earnings (deficit) (61,000)
of accum depn-P120,000 80,000
Total Assets P204,000 Total Liab. & Capital P204,000

Sales are budgeted to be P220,000 in February, and P240,000 in March. Collections are
expected to be 60% in the month of sale, 38% the next month, and the remaining 2%
uncollectible.

The gross profit rate is 25% of sales. Purchases, which are paid in full the following month, are
75% of the next month’s budgeted sales. Operating expenses for each month, all paid in cash,
are P33,000. Monthly depreciation is P10,000.

32. What will be the budgeted cash collections for February?

a. P208,000 b. P132,000 c. P203,600 d. None of the above.

33. What is the budgeted income (loss) before income tax for February?
a. P 7,600 b. (P3,000) c. P12,000 d. d. None of the above.
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 15 of 17

34. The projected balance in accounts payable at the end of February is

a. P173,500 b. P180,000 c. P165,000 d. None of the above.

QUESTIONS 35 THROUGH 44 ARE BASED ON THE FOLLOWING INFORMATION.

The following information has been gathered by the Budget Director of the Kareton Company,
another outfit managed by the Masugid Company. The firm manufactures and sells only one
product. The selling price during the coming month is expected to be the prevailing price of P5
per unit. Expected sales during the month is a total of 75,000 units of finished goods. Finished
goods expected to be on hand at the end of the month total 50,000 units. Finished goods
expected to be on hand at the beginning of the month total 42,000 units.

Direct labor cost is P3.00 per hour. One-fourth an hour of direct labor is required to
manufacture each unit of finished product.

Factory overhead is applied to work-in-process on the basis of direct labor hours. Variable
factory expenses at the planned level of operations is expected to amount to P33,200; fixed
overhead is expected to amount to P99,600.

The raw materials expected to be on hand at the beginning of the month total 5,000 gallons.
Only one kind of raw material is used to produce the finished goods. One and one-half gallons
of raw material are needed to manufacture each unit of finished product. Raw materials are
expected to cost P0.18 per gallon during the coming month, its prevailing cost. Raw materials
expected to be on hand at the end of the month total 8,000 gallons.

Variable administrative and selling expenses is P1.00 per unit.

In assisting the company to formulate the budget, you determined the following budget
parameters.

35. The total expected peso sales is

a. P75,000 b. P83,000 c. P375,000 d. P250,000

36. Finished goods in units to be produced during the month is

a. 75,000 units. b. 33,000 units. c. 50,000 units. d. 83,000 units.

37. Budgeted cost of raw materials to be used in production is

a. P124,500 b. P124,500 c. P14,940 d. P22,410

38. Budgeted raw materials purchases cost is

a. P22,950 b. P22,410 c. P23,760 d. P124,500

39. Budgeted direct labor is

a. P20,750 b. P83,000 c. P62,250 d. P33,200

40. Variable overhead cost per direct labor hour is

a. P1.60 b. P4.80 c. P1.80 d. P6.40

41. Fixed overhead cost per direct labor hour is

a. P1.60 b. P4.80 c. P1.80 d. P6.40

42. Budgeted contribution margin is

a. P5.00 b. P0.706 c. P1.80 d. P2.58

43. Budgeted cost of goods sold (full cost) is

a. P76,500 b. P96,500 c. P196,500 d. P304,000

44. Net profit before tax is

a. P178,500 b. P103,500 c. P53,000 d. P249,500
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 16 of 17

1. C 11. A 1. C 11. D 21. D 31. A 41. B

2. D 12. A 2. D 12. B 22. C 32. A 42. D
3. C 13. B 3. C 13. B 23. D 33. A 43. C
4. D 14. B 4. C 14. D 24. C 34. B 44. B
5. D 15. C 5. D 15. D 25. C 35. C
6. C 16. B 6. D 16. C 26. A 36. D
7. D 17. D 7. D 17. B 27. A 37. D
8. B 18. D 8. A 18. A 28. C 38. A
9. B 19. B 9. B 19. B 29. C 39. C
10. D 20. C 10. A 20. B 30. B 40. A

- END –
MAS 9010 OPERATING AND FINANCIAL BUDGETING Page 17 of 17

1. January February March Total

Sales 100,000 120,000 110,000 330,000
Add desired ending inventory 12,000 11,000 10,000 10,000
Total needs 112,000 131,000 120,000 340,000
Less: Beginning inventory 5,000 12,000 11,000 5,000
Units to be produced 107,000 119,000 109,000 335,000

2. March April May Total

Units to be produced 6,000 9,000 15,000 30,000
Direct materials per unit (yards) × 10 × 10 × 10 × 10
Production needs 60,000 90,000 150,000 300,000
Desired ending inventory (yards)
[25% next month] 22,500 37,500 25,000 25,000
Total needs 82,500 127,500 175,000 325,000
Less beginning inventory 15,000 22,500 37,500 15,000
Direct materials to be purchased (yards) 67,500 105,000 137,500 310,000
Cost per yard × P2 × P2 × P2 × P2
Total purchase cost P135,000 P210,000 P275,000 P620,000

March April May Total

Units to be produced 6,000 9,000 15,000 30,000
Direct labor time per unit (hours) × 0.05 × 0.05 × 0.05 × 0.05
Total hours needed 300 450 750 1,500
Cost per hour × P60 × P60 × P60 × P60
Total direct labor cost P18,000 P27,000 P45,000 P90,000

6. Credit sales in May = P288,000 x 0.8 = P230,400

Credit sales in June = P276,000 x 0.8 = P220,800
Credit sales in July = P295,000 x 0.8 = P236,000
Credit sales in August = P300,000 X 0.8 = P240,000

July August
Cash sales 59,000 60,000
Collection of accounts receivable:
From May credit sales (0.08 x P230,400) 18,432 ---
From June credit sales (0.50 x P220,800) 110,400
(0.08 x P220,800) 17,664
From July credit sales (0.40 x P236,000) 94,400
(0.50 x P236,000) 118,000
From August credit sales (0.40 x P240,000) --- 96,000
Cash receipts P282,232 P291,664

7. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year

Cash bal. beginning P 20,000 P 10,000 P 35,800 P 25,800 P 20,000
Total cash receipts 180,000 330,000 210,000 230,000 950,000
Total cash available 200,000 340,000 245,800 255,800 970,000
Less total disbursements 260,000 230,000 220,000 240,000 950,000
Excess (deficiency) (60,000) 110,000 25,800 15,800 20,000
Financing:
Borrowings (beg. of qtr.) 70,000 70,000
Repayments (end of qtr.) (70,000) (70,000)
Interest (70,000x 3%x2) _______ (4,200) _______ ________ (4,200)
Total financing 70,000 (74,200) _______ ________ (4,200)
Cash balance, ending P10,000 P35,800 P 25,800 P 15,800 P 15,800