Part IV – The Master Budget Solution

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

The average price for a drum is P35.

Required: Prepare a sales budget for the first three months of the coming year, showing units and sales
revenue by month and in total for the quarter.

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 mounts of the coming year, Patrick expects
the following unit sales:
January 41,000
February 38,000
March 50,000
April 51,000

Patrick’s policy is to have a 25% of next month’s sales in ending inventory. On January 1, it is expected
that there will be 6,700 drums of solvent on hand.

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

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
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

Each drum requires 5.5 gallons of chemicals and one plastic drum. Company policy requires that
ending inventories of raw materials for each month be 15% of the next month’s production needs. That
policy was met for the ending inventory of December in the prior year. The cost of one gallon of chemicals
is P2.00. The cost of one drum is P1.60. (Note: Round all unit amounts to the nearest unit.

Required:

a. Calculate the ending inventory of chemicals in gallons for December of the prior year, and for
January and February. What is the beginning inventory of chemicals for January?
Chemicals in gallons ending inventory: 36,135 33,825 41,456
So beg Inv for Jan is 36,135
b. Prepare a direct materials purchases budgets for chemicals for the months of January and
February.
c. Calculate the ending inventory of drums for December of the prior year, and for January and
February.
Drums ending inventory: 6,570 6,150 7,538
d. Prepare a direct materials purchases budgets for drums for the months of January and
February.

Patrick Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2020
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

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

Each drum of industrial solvent takes 0.3 direct labor hours. The average wage is P18 per hour.

Required: Prepare a direct labor budget for the months of January, February, and March, as well as
the total for the first quarter.

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

The variable overhead rate is P0.70 per direct labor hour. Fixed overhead is budgeted at P2,750 per month.

Patrick Inc.
Overhead Budget
For the 1​st​ 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 P 0.70 X P 0.70 X P 0.70
Budgeted variable overhead P9,198 8,610 10,553 28,361
Budgeted fixed overhead* 2,750 2,750 2,750 8,250
Total Overhead P11,948 P11,360 P13,303 P36,611

Required: Prepare an overhead budget for the months of January, February, and March, as well as the total
for the first quarter. (Note: Round all dollar amounts to the nearest dollar.)

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
ending inventory. There is no beginning inventory of office chairs.

Required:

a. Calculate the unit product cost. (Note: Round to the nearest cent.)
b. Calculate the cost of budgeted ending inventory. (Note: Round to the nearest dollar.)

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 P33,561

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.

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 finshed 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
Advertising 1,200,000

Required: Prepare a selling and administrative expenses budget for Fazel Company for the coming year.

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

Oliver Company provided the following information for the coming year:

Units produced and sold 160,000

Cost of goods sold per unit P 6.30
Selling price P 10.80
Variable S&A expenses per unit P 1.10
Fixed S&A expenses P423,000
Tax rate 35%
Required: Prepare a budgeted income statement for Oliver Company for the coming year. (Note: Round all
income statement amounts to the nearest dollar.)
 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: VariableS&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)
Net Income P78,650

10. Preparing a schedule of Cash Collections on Accounts

Kailua and Company is a legal services firm. All sales of legal services are billed to the client
(there are no cash sales). Kailua expects that, on average, 20% will be paid in the month of billing, 50%
will be paid in the month following billing, and 25% will be paid in the second month following billing. For
the next five months, the following sales billings are expected:

May P84,000
June 100,800
July 77,000
August 86,800
September 91,000

Required: Prepare a schedule showing the cash expected in payments on accounts receivable in August and
in September.

Source August September

Received 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

Wight Inc. purchases raw materials on account for use in production. The direct materials
purchases budget shows the following expected purchase on account:

April P374,400
May 411,200
June 416,000
 Wight typically pays 20% on account in the month of billing and 80% the next month.

Required:

a. How much cash is required for payment on account in May?

b. How much cash is expected for payments on account in June?

Source May June

Cash needed for payments:

April 299,520
May 82,240 328,960
June 83,200

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.

Required:

a. Calculate the cash receipts expected in October. (Hint: Remember to include both cash sales and payments
from credit sales.)
b. Calculate the cash needed in October to pay for food purchases.
c. Prepare a cash budget for the month of October

Solution:

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
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

The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs
P2.50 per pound. The beginning inventory of materials is 4,000 pounds. Joven Products wants to have
6,000 pounds of metal in inventory at the end of the quarter. Each rack produced requires 30 minutes of
direct labor time, which is billed at P9 per hour.

Required:

a. Prepare a sales budget for the first quarter.

b. Prepare a production budget for the first quarter
c. Prepare a direct materials purchases budget for the first quarter.
d. Prepare a direct labor budget for the first quarter.

Solution:

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

Sales (in units) 100,000

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

c. Direct Materials Purchases 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

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.

Required:

a. Prepare a cash budget for Kylles Inc. for the month of March.
b. Assume that Kylles Inc. wanted a minimum cash balance of P15,000 and that it could borrow
from the bank in multiples of P1,000 at an interest rate of 12% per year. What would the
adjusted ending balance for March be for Kylles? How much interest would Kylles owe in
April, assuming that the entire amount borrowed in March would be paid back?

Solution:

a.

Kylles Inc.
Cash Budget for the Month of March

Beginning cash balance P1,230

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