WEEK 1-3

ULOd. Describe the budgeting framework and develop a master budget.

Excercise (3-1): Developing a Master Budget

The Crown Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units
The selling price is P10 per unit.

Sales budget
Month 1 Month 2 Month 3 Total
Sales in units 20,000 50,000 30,000 100,000

X selling price (SP) 200,000 500,000 300,000 P1,000,000

Production budget
The management at Crown Company wants ending inventory to be equal to 20% of the following
month’s budgeted sales in units. On March 31, 4,000 units were on hand.
Month 1 Month 2 Month 3 Month 4
Budgeted Sales 20,000 50,000 30,000 25,000

Add: Desired 20% x 50,000 = 20% x 30,000 = 20% x 25,000 = 20% x 15,000 =
Ending Inventory
10,000 6,000 5,000 3,000

Total units needed 30,000 56,000 35,000 28,000

Less: Beg. Inv. 4,000 10,000 6,000 5,000

Req. production 26,000 46,000 29,000 23,000

Direct materials budget and its cash disbursement budget

At Crown Company, five pounds of materials are required per unit of product. Management
wants materials on hand at the end of each month equal to 10% of the following month’s
production. On March 31, 13,000 pounds of material are on hand. Material cost is P0.40 per
pound. One-half of a month’s purchases is paid for in the month of purchase; the other half is
paid in the following month. The March 31 accounts payable balance is P12,000.
Month 1 Month 2 Month 3 Total
Req. production 26,000 46,000 29,000 101,000
Mat’ls needed/unit 5 lb 5 lb 5 lb 5 lb
Total req. mat’ls 130,000 230,000 145,000 505,000
Add: Desired E/Inv. 10% x 230,000 = 10% x 145,000 = 10% x 23,000 x 5 11,500
=
23,000 lb 14,500
11,500
Total mat’ls 153,000 244,500 156,500 516,500
needed
Less: Beg. Inv. 13,000 23,000 14,500 13,000
Mat’ls purchased 140,000 221,500 142,000 503,500
X purchase price P0.40 P0.40 P0.40 P0.40
 Total purchased 56,000 88,600 56,800 201,400
cost
Payment made 56,000/2 = 28,000 88,600/2 = 44,300 56,800/2 = 28,400 P185,000
+ 12,000 = 40,000 + 28,000 = 72,300 + 44,300 = 72,700

Direct labor budget and its cash disbursement budget

At Crown Company, each unit of product requires 0.05 hours (3 minutes) of direct labor. In
exchange for the “no layoff” policy, workers agree to a wage rate of P10 per hour regardless of
the hours worked (NO overtime pay).
Month 1 Month 2 Month 3 Total
Req. production 26,000 46,000 29,000 101,000
Hours needed/unit 0.05 hour 0.05 hour 0.05 hour 0.05 hour
Total Hours Req. 1,300 2,300 1,450 5,050
X labor rate P10 per hour P10 per hour P10 per hour P10 per hour
Total labor budget 13,000 23,000 14,500 P50,500
cost

Factory overhead budget and its cash disbursement budget

At Crown Company, manufacturing overhead is applied to units of product on the basis of direct
labor hours. The variable manufacturing overhead rate is P20 per direct labor hour. Fixed
manufacturing overhead is P50,000 per month and includes P20,000 of noncash costs (primarily
depreciation of plant assets).
Month 1 Month 2 Month 3 Total
Budg. Hours Req. 1,300 2,300 1,450 5,050
X VOH rate P20 per DLH P20 per DLH P20 per DLH P20 per DLH
Variable FOH 26,000 46,000 29,000 P101,000
Fixed FOH 50,000 50,000 50,000 P150,000
Total FOH cost 76,000 96,000 79,000 P251,000
Less: Non-cash cost 20,000 20,000 20,000 P60,000
Cash Disbursement 56,000 76,000 59,000 P191,000
for FOH

Ending finished goods inventory budget

Production Cost Quantity needed/unit Cost/unit TC/unit
Direct Materials 5 lb P0.40 per lb P2
Direct Labor 0.05 hour P10 per DLH P0.50
FOH 0.05 hour P251,000 / 5,050 DLH = P2.49
P49.70
Product Cost per unit P4.99

Ending inventory (units) 5,000

X unit production cost P4.99
Ending Finished Goods P24,950

Selling and administrative budget

At Crown Company, the selling and administrative expenses budget is divided into variable and
fixed components. The variable selling and administrative expenses are P0.50 per unit sold.
Fixed selling and administrative expenses are P70,000 per month. The fixed selling and
administrative expenses include P10,000 in costs – primarily depreciation – that are not cash
outflows of the current month.
 Month 1 Month 2 Month 3 Total
Budgeted sales 20,000 50,000 30,000 100,000
X VS&A rate P0.50 per unit P0.50 per unit P0.50 per unit P0.50 per unit
VS&A expenses 10,000 25,000 15,000 50,000
Fixed S&A 70,000 70,000 70,000 210,000
Total S&A 80,000 95,000 85,000 260,000
Less: non-cash 10,000 10,000 10,000 30,000
costs
Cash disbursement 70,000 85,000 75,000 P230,000

Cash collections budget

All sales are on account. Crown’s collection pattern is: 70% collected in the month of sale, 25%
collected in the month following sale, 5% uncollectible. The March 31 accounts receivable
balance of P30,000 will be collected in full.

Cash budget
The beginning cash balance for March 31 is P350,000. Dividend declared and paid are: P15,000,
P17,000 and P20,000 for the month of April, May and June, respectively.
Month 1 Month 2 Month 3 Total
Beg. Cash balance 350,000 326,000 452,700 P350,000
Add: cash 200,000 x 70% = 500,000 x 70% = 300,000 x 70% = P905,000
collections 140,000 + 30,000 350,000 210,000
= 170,000 200,000 x 25%= 500,000 x 25%=
50,000 125,000
= 400,000 = 335,000
Total cash available 520,000 726,000 787,700 P1,255,000
Less: cash
disbursements
D-Materials 40,000 72,300 72,700 P185,000
D-Labor 13,000 23,000 14,500 P50,500
FOH 56,000 76,000 59,000 P191,000
S&A 70,000 85,000 75,000 P230,000
Dividend 15,000 17,000 20,000 P52,000
Excess (deficiency) 326,000 452,700 546,500 P546,500
Add (deduct):
Financing
Add: Borrowing
Less: Interest
Ending Cash 326,000 452,700 546,500 P546,500
Balance