COO – FORM 12

SUBJECT TITLE: MANAGEMENT ACCOUNTING II

INSTRUCTOR: IVY JOY C. SERVIANO,CPA
SUBJECT CODE: PFE4-MA2

MIDTERM MODULE

TOPIC 1: FINANCIAL PLANNING AND BUDGETS

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand why organizations budget and the processes they use to create budgets.
2. Identify different types of budgets.
3. Recall different models for budgeting.

NOTES:

A. OVERVIEW OF BUDGETING

Budget- a realistic plan, expressed in quantitative terms, for a certain future period of time.
Once established, it serves as goals and guidelines, to be adhered to, and to be respected. That
is, actions must be in conformity with the terms of the plans.

Difference between a budget and a forecast

BASIS BUDGET FORECAST
EVENTS It relates to planned events It is concerned with probable events
PERIOD Planned separately for each accounting May cover a long period or years
period
COVERAGE Comprises the whole business unit It may cover a limited function
CONTROL It is a tool of control It does not connote any sense of control
PROCESS It starts where forecast ends It ends with the forecast of likely events

USES OF BUDGETING:
1. Communication 4. Motivation
2. Standards 5. Planning
3. Organizing and directing 6.Controlling and performance evaluation

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MASTER BUDGET RELATIONSHIPS:

ADVANTAGES OF BUDGETING:

1) Budgets can be used by the top management to communicate its plans and goals
throughout the organization.
2) Budget force the management to think about and plan for the future.
3) Through budgeting, resources are more appropriately allocated
4) Through budgeting, potential bottlenecks can be discovered before they occur
5) Budgeting promotes coordination of the activities of the entire organization
6) The goals and objectives identified in the budgeting process can be serve as bench
marks or standards for evaluating performance

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B. TYPES OF BUDGETS AND OTHER BUDGETING CONCEPTS

TYPES OF BUDGETS:

1) Flexible budgeting
A series of budgets prepared for many levels of activity. It makes possible the adjustment
of the budget to the actual level of activity before comparing the budget figures with the
actual results.

2) Fixed or static budgeting

A budget based on only one level of activity (sales or production volume).

3) Continuous or rolling budgeting

A budget that is revised on a regular (continuous) basis. For example, a budget for 12 months
is extended for another month in accordance with new data as the current month ends.

4) Zero based budgeting (ZBB)

A budget is prepared every period from a base of zero. All expenditures must be justified
regardless of variances from previous periods.

5) Participative budgeting
Participative budgeting is a budgeting process in which the people who are in the lower levels
of management are involved in the budget preparation process. Unlike the imposed
budgeting process, participative budgeting shares the responsibility with lower-level
managers to give them a sense of ownership in the business.

6) Life cycle budgeting

A product’s revenues and expenses are estimated over its entire life cycle (from research
and development to withdrawal of customer support). This concept is helpful in target costing
and target pricing. It accounts for, and emphasizes the costs at all stages of the value chain,
the relationships among such as research and development, design, production, marketing,
distribution, and customer service.

7) Activity based budgeting

Unlike in the traditional emphasis on functions or spending categories, activity-based
budgeting applies the ABC principles and procedures to budgeting.

Ø the activities are identified, a cost pool is established for each activity is established
for each activity, a cost driver is identified for each pool, and the budgeted cost for
each pool is determined by multiplying the budgeted demand for the activity by the
estimate cost per unit of such activity.

8) Kaizen budgeting
Kaizen is a Japanese term that means continuous improvement. Thus, Kaizen budgeting
assumes the continuous improvement of products and processes; the effects of improvement
and the costs of their implementation are estimated.

Ø Kaizen budgeting is based not on the existing system but on changes that are to be
made.

9) Governmental budgeting
In a private-sector budget, a governmental budget is not only a financial plan and a basis
for performance evaluation but also an and a form of control having the force of law.

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 Definition of terms:

1) Budget committee- composed of key management persons who are responsible for overall
policy matters relating to the budget program and for coordinating the preparation of the
budget itself.

2) Responsibility center- part or sub-unit of a company for which a manager has authority and
responsibility. The company’s detailed organizational chart is a logical source for the
determining responsibility centers. The most common responsibility center can control any
cost; the responsibility center is referred to as a cost center. If a manager can control both
cost and revenues, the responsibility center is known as a profit center. If a manager has
authority and responsibility for cost, revenues and investment, the responsibility center is
referred to as an investment center.

3) Master budget- a summary of company plans that sets specific target for sales, production,
distribution, and financing activities. It composed of, budgeted income statement, a budgeted
balance sheet, and budgeted statement of cash flows. In short, this budget represents a
comprehensive expression of management plans for future and how these plans are to be
accomplished. This budget can also be divided into operating and financial budget.

4) Operating budget- the detailed projection of all estimated income and expenses based on
forecasted sale revenue during a given period (usually one year). It generally consists of
several sub-budgets, he most important one being the sales budget, which is prepared first.
This budget is needed to make the budgeted income statement.

5) Financial budget- includes the budgeted balance sheet, which shows the effects of planned
operations and capital investment on assets, liabilities, and equities. It also includes a cash
budget, which forecasts the flow of cash and other funds in the business.

C. MASTER BUDGET AND ITS COMPONENTS

A. OPERATING BUDGET:
1. SALES BUDGET
2. PRODUCTION BUDGET
3. RAW MATERIALS BUDGET
4. PURCHASES BUDGET
5. DIRECT LABOR BUDGET
6. FACTORY OVERHEAD BUDGET
7. RESEARCH AND DEVELOPMENT BUDGET
8. SELLING AND ADMINISTRATIVE EXPENSE BUDGET
9. BUDGETED INCOME STATEMENT

B. FINANCIAL BUDGET
1. CASH BUDGET
2. SCHEDULE OF ACCOUNT RECEIVABLE COLLECTIONS
3. SCHEDULE OF ACCOUNTS PAYABLE PAYMENTS
4. BUDGETED STATEMENT CASH FLOWS
5. CAPITAL EXPENDITURE BUDGET
6. BUDGETED BALANCE SHEET

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 Budget manual – describes how the budget is to be prepared. It includes:

a) Budget planning calendar – the schedule of activities for the development and adoption of
the budget. It includes the list of dates indicating when specific information is to be provided
by those who are involved in the budgeting process.
b) Distribution instructions – must be given so that those people involved in the budget
preparation would know to whom a computed schedule is to be given or acquired.
c) Budget report – shows the comparison of the actual and budget performance. The budget
variance, which is properly described as either favorable or unfavorable, are also shown on
the report.

EXERCISES:

1. Budgeting is –
a) The process of creating a formal plan and translating goals into quantitative format.
b) A technique for comparing actual costs with the standard cost.
c) A technique for determining the cost of manufactured products.
d) A means of product costing that emphasizes activities as basic cost objects.

2. Budgets are related to the following management functions except –

a) planning c) performance evaluation
b) control d) none of the above

3. Which of the following statement regarding budgeting is incorrect?

a) Planning and control are the essential features of the budgeting process
b) Capital expenditures budget shows the availability of idle cash for investment
c) Budgeting provides a measuring device to which subsequent performances are
compared and evaluated.
d) Budget preparation is not the sole responsibility of any one organizational segment
and is prepared by combining the efforts of many individuals.

4. The master budget-

a) Shows a comparison of forecasted and actual results
b) Is composed of the operating and financial budgets
c) Reflect only those costs controllable by the individual manager
d) Is the budget of the master of the firm.

5. Following are parts of the operating budget except –

a) sales budget c) cash budget
b)Materials cost budget d) direct labor budget

6. A continuous or rolling budget

a) Works for a firm that can reliably forecast events a year or more in the future
b) Presents the budgeted amounts for a range of activities so that the amounts can be
adjusted for changes in activities.
c) Drops the current month or quarter and adds a future month or quarter as the current
month or quarter is completed
d) Assumes a continuous improvement of a product or processes

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

a) Participative budgeting results in greater support of the organization because individuals
at all levels of the organization are recognized as being part of the team.

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 b) Participative budgeting
involves those most directly affected.
c) Top management need not to be concerned with the overall profitability of the current
operations because lower level managers set the final target for the budget.
d) Participative budgeting improves accountability because managers are held responsible
for reaching their goal, such that they cannot shift their responsibility by blaming the
unrealistic goals demanded by the budget.

8. A budget is a control technique that, among other things, establishes a performance standard.
However, a natural reaction of a manager whose efforts are to be evaluated is to incorporate
slack into the budget. Which of the following about budgetary slack is incorrect?
a) Budgetary slack can best be described as the planned overestimation of budgeted expenses.
b) The use of budgetary slack prohibits the use of the budget to control subordinate performance.
c) From the perspective of corporate management, the use of budgetary slack increases the
likelihood of inefficient resource allocation.
d) Budgetary slack eliminates the likelihood that a manager will receive the personal rewards
that follow from meeting the expectations of superiors.

9. Which of the following statements about flexible budget is false? A flexible budget
a) Is a series of budgets prepared for various level of activity
b) Accommodate changes in activity levels so that actual results can be compared with
meaningful budget amounts
c) Is used to evaluate capacity used
d) Assumes that total fixed cost and unit variable cost are constant within relevant range.

10. A life cycle budget is a budgeting tool or process-

a) Which summarizes all the company’s budgets and plans
b) In which estimates of revenues and expenses are prepared for its product beginning with the
product research and development phase and traced through its customers’ support phase.
c) Which emphasizes the cost of activities
d) Which requires each manager to justify his/units entire budget period.

---END OF TOPIC 1---

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 TOPIC 2: OPERATING BUDGET

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Identify the components of the operating budget.
2. Prepare and calculate sales budget.
3. Prepare and calculate other supporting budgets.

NOTES:

A. SALES BUDGET

Sales budget- a detailed schedule showing the expected sales for coming period; these sales
are typically expressed in both pesos and units.

Sales indicate meeting customers’ wants, needs, desire, etc. it is the motive of business
organization and the start of business planning. Mathematically, sales are affected by the unit
sales price and quantity sold. The unit sales price is affected by:

• Cost, • Competition,
• product substitute, • market trends,
• government regulations, • demand and supply behavior, and
• estimated profit among other
things
.
The number of units sold is affected by the unit sales price. Other factors influencing sales
forecast include the:
• past sales volume
• general economic and industry condition
• relationship of sales to economic indicators (such as GDP, GNP, personal income,
employment, price and industrial production)
• relative product profitability
• market research studies
• advertising and other promotion
• quality of sales force
• seasonal variation
• production capacity and
• long run sale trends for various productions.

In forecasting sales, factors that have strong correlation with sales patterns are identified and
used.

Basically, there are six ways of making estimates for the sales budget (sales forecast)

1) Sales trends analysis – under this method, the product life cycle is used in making the
forecast. The growth commences at the introduction of the product and accelerates during
its middle year and then plateaus (reaches maximum) then it declines. It is essential that
the company what part of the lifecycle is the product.

2) Sales force composite method. Under this method, each sales man estimates the sales in
his particular territory. Historical sales may be used by each sales man as basis for
estimating the probable sales for the next period.

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3) Executive opinion method. Under this method, the views of a number of top executive are
called to arrive at a sales estimate.

4) Industry trend analysis method. Under this method, the relationship between expected
industry sales and the company sales in terms of market share is determined. The growth
statistics of the entire industry is assist and a forecast is made. The firms’ growth pattern
is also determined and compared with that of the industries’ to come up with the trend.
When the trend is determined, a percentage of the expected total market for the budget
period is estimated. This percentage is then multiplied to estimate of the total industry
sales and the result is considered the sales forecast of the company.

5) Correlation analysis method. In this more scientific means of forecasting sales by using
regression analysis. In this statistics, we were taught that linear regression equations are
used to determine or predict the movement or existence of a dependent variable
depending on the movement or existence of an independent variable. The variables are
placed in the equation and thus, predict what sales would be. The regression equation is
used to determine the cost and effect relationship between sales and the factors affecting
it. (mathematical method)

6) Multiple approach method. This method uses a combination of the various methods
discussed.

B. PRODUCTION BUDGET

Production budget- the production budget is prepared after the sales budget. The production
budget lists the number of units that must be produced during each budget period to meet
sales needs and to provide for the desired ending inventory. The production budget is actually
an estimate of production for that budget period. It is very first drawn up in amounts of each
product and when the leftover budgets have been ready and cost of production calculated,
next the quantities of manufacturing cost are translated into cash terms, what in impact
becomes a production cost budget. The production budget is actually the initial step in
budgeting production operations. Additionally, to production budget, you can find three other
budgets associated with manufacturing activities of an organization. These are labor budget,
raw materials budget and production overhead budget.

Factors: The principal considerations involved in budgeting production are:

1. Sales budget. When sales is the principal budget factor, the production budget will be based
on the volume of sales forecast by the sales budget.

2. Inventory policy. The management decision regarding quantities needed is stock at all
times to meet customer requirements is an important factor.

3. Production capacity. The production capacity of every department needs to be worked out
and budget figures must be within these limits.

4. Management policy. Production policy from the management plays a significant role in
budgeting production. For instance, management might decide to purchase a particular
component part through outside instead of manufacturing it. This can influence production

B. RAW MATERIALS BUDGET

Raw materials budget- the raw materials budget is based on the budgeted production. Multiply
the budgeted production by the standard materials per unit of finished goods to get the
budgeted direct materials to be used. The raw materials purchases are based on the beginning

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and ending raw materials inventory.
Direct materials budget or raw materials budgeting details the raw material that must be
purchased to fulfill the production requirement and to provide for adequate inventories. This
budget exhibits the estimated quantities of most the raw materials and components required
for production demanded through the production budget. Raw material budget serves the
following purposes:
1. It assists the purchasing department in planning the purchases.
2. It helps in the preparation of purchase budget.
3. It provides data for raw material control.

It should be noted that raw material budget generally deals with only the direct materials
whereas indirect materials and supplies are included in the overhead cost budget.

C. PURHASES BUDGET

Purchases budget - Careful planning of purchases offers one of the most significant areas of
cost saving in many concerns. The purchase manager should be assigned the direct
responsibility for preparing a detailed of purchases for the budget period and for submitting
the plan in the form of a purchase budget. The purchases budget provides details of the
purchases which are planned to be made during the period to meet the needs of the business.
It indicates:

1. The quantities of each type of raw material and other items to be purchased;
2. The timing of purchases and
3. The estimated cost of material purchases.

D. DIRECT LABOR BUDGET

Direct labor budget – assuming a labor- intensive operation where workers are paid by hour,
the budgeted direct labor hours is budgeted production times the standard of direct labor hour
per unit produced. The standard direct labor rate per hour is to be supplied by the human
resources department (HRD). Direct labor requirements must be computed so that the
company will know whether sufficient labor time is available to meet the budgeted production
needs. By knowing in advance how much labor will be needed throughout the budget year, the
company can develop plans to adjust the labor force as situation requires.

Purposes: The labor budget serves the following purposes:

1. To estimate the labor cost of production.

2. To determine the direct labor required in terms of labor hours and hence the number
and grade of workers required to meet the production requirements.
3. To provide the personnel department with personnel requirements so that it may plan
recruitment activities.
4. To provide data for determination of cash requirements for payment of wages.
5. To provide data for managerial control of labor cost.

E. FACTORY OVERHEAD BUDGET

Factory overhead budget – it is consist of fixed and variable. Fixed overhead is constant in
total and fixed overhead rate is computed based on the normal capacity. Total variable costs
change while unit variable cost is constant. The production overhead budget involves the
preparation of overheads budgets for each department of the factory as it is desirable to have
estimates of manufacturing overheads prepared by those individuals who have the
responsibility for incurring them. The budget expenses for each sub-period. During the budget
period should be indicated and the classification of expenses should be the same as used by

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the accounting department. The
budgeted overhead costs of service departments are totaled and apportioned to production
departments according to the services received by each such production department. The
budgeted overhead costs of service departments are totaled and apportioned to production
departments according to the services received by each such production department.

F. RESEARCH ANG DEVELOPMENT BUDGET

Research and development – companies which play leading roles in their industries and line of
business, or companies that operate in a technology-based business environment, need to
allocate resources for research and development to stay competitive and relevant in their
services to customers. Detailed research and development budget would provide important
information to managers in their strategic and tactical decisions.

G. SELLING AND ADMINISTRATIVE EXPENSE BUDGET

Selling and administrative expense budget- this budget lists the budgeted expenses for areas
other than manufacturing. In large organizations this budget would be a compilation of many
smaller, individual budgets submitted by department heads and other persons responsible for
selling and administrative expenses. For example, the marketing manager in a large
organization would submit a budget detailing the advertising expenses for each budget period.

H. BUDGETED INCOME STATEMENT

Budgeted income statement contains all of the line items found in a normal income statement,
except that it is a projection of what the income statement will look like during future budget
periods. This is compiled from other budgets such as the sales budget, production budget, and
selling and administrative budget.

EXERCISES:

1. The starting point in preparing a comprehensive budget is-

a) the cash budget c) the sales forecast
b) the budgeted income statement d) the production budget

2. Ernie trading co. budgeted merchandise purchases of 40,000 units next month. The
expected beginning inventory is 12,000 units and the desired ending inventory at the end
of next month is 15,000 units. Budgeted sales in units next month is _________________.

3. Y company has budgeted sales of 90,000 units in January; 120,000 units in February; and
180,000 units in March. The company has 20,000 units on hand on January 1. If Y
requires an ending inventory of finished goods equal to 20% of the following month’s
sales, the budgeted production during February is __________________

4. X company has budgeted sales of 90,000 units in January; 120,000 in February; and 180,000
in March. X has 20,000 of finished goods and 35,000 pieces of materials on hand on January
1. Each unit of product requires 5 pieces of materials. The desired inventory of finished
goods and materials at the end of each month is as follows:

Finished goods 20% of next month’s sales

Materials 25% of next month’s production needs

A. How many units of finished goods should the company plan to produce in February?
B. How many units of materials should the company plan to purchase in January?

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5. C Inc. prepared the following figures for its only product as a basis for its 200B budget:

Budgeted sales 240,000 units

Selling price P5
Required materials per unit of a product 2 pieces
Materials beginning inventory 20,000 pieces
Materials ending inventory 24,000 pieces
Purchase price per piece of material P3
Finished goods beginning inventory 15,000 units
Finished goods ending inventory 18,000 units
Direct labor hours, per 1,000 units of product 60 hours
Direct labor rate per hour P30
Variable factory overhead rate per hour P10
Fixed factory overhead P300,000

A. The budgeted peso amount of materials purchases is _____________________

B. The total budgeted manufacturing cost for 200B is _____________________

6. Bignat Corporation’s budget includes the following data:

Budgeted Sales 7,200

Inventories: Beginning Ending
Finished goods 300 400
Work-in-process in equivalent units 60 160

How many equivalent units should Bignat Corporation plan to produce during the budget
period?

7. Lion corp. produces and sells push button switches to manufacturers of electric fans. For the
year 200B, the sales of electric fans have been 800,000 units. The corp. regularly supplies
60% of the push button switches used in the production of new electric fans. Each electric
fan requires four switches. In addition, a replacement parts market also exists. Over the 5
years, the sales of the replacement push button switches have increased per year by 20%
of the preceding years’ sales. In 200A, the corp. sold 150,000 units of push button
replacement switches. The trend is expected to continue in 200B.

The corp. sells the push buttons switches for P10 per piece in both markets.

The budgeted sales revenue based on the expected number of pieces of push button
switches to be sold in 200B is ____________.

---END OF TOPIC 2---

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 TOPIC 3: FINANCIAL BUDGET

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Identify the components of financial budget.
2. Prepare and calculate a cash budget.
3. Prepare and calculate budgeted financial statement.

NOTES:

A. CASH BUDGET

Cash budget – is a detailed plan showing how cash resources will be acquired and used over
some specific time period.

B. SCHEDULE OF ACCOUNTS RECEIVABLE COLLECTIONS

Schedule of accounts receivable collections – credit sales are collected over a period of time.
Collection patterns are to be established to more accurately estimate the inflows of cash from
operations. A schedule of accounts receivable collections from credit sales is to be done. Total
collections from receivables include those from credit customers and cash sales.

C. SCHEDULE OF ACCOUNTS PAYABLE PAYMENTS

Schedule of accounts payable payments- credit purchases are not usually paid in the month of
purchase. Normally, payments are paid spread over a number of months. A schedule of
accounts payable is to be made to more accurately determine timing of cash outflows to
suppliers.

D. BUDGETED STATEMENT CASH FLOWS

Budgeted statement cash flows – managers are also interested in the daily and regular cash
position of the business to effectively monitor operating activities. An analysis of cash inflows
and outflows would provide management vital information on the liquidity needs of the
business.

E. CAPITAL EXPENDITURES BUDGET

Capital expenditures budget – identifies the amount of cash a company will invest in projects
and long term assets.

F. BUDGETED BALANCE SHEET

Budgeted balance sheet – contains all of the line items found in a normal balance sheet, except
that it is a projection of what the balance sheet will look like during future budget period.

EXERCISES:

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1. One component of the financial
budget is the cash budget. It is prepared periodically to facilitate cash planning and control.
Its purpose is to anticipate cash needs while minimizing the amount of idle cash. The cash
receipts section of the budget includes all sources of cash, among which is

a) depreciation c) extinguishing of debt

b) factory supplies d) loan proceeds

2. D corp. is preparing its cash budget for next year. Budgeted sales for four months are as
follows:

April P80,000
May P160,000
June P200,000
July P80,000

All sales are on account. The credit sales is collected in the following manner:

70% in the month of sale

20% one month after the sale
10% two months after the sale

A. How much is the budgeted cash receipt in May?

B. How much is the budgeted cash receipt in July?

3. M Company has just prepared its master budget for the year 200B. Some of the information
used in the preparation of such budget is as follows:

I. Budgeted sales

January 400,000
February 500,000
March 600,000
April 500,000
May 400,000
June 800,000

II. All sales are on account. The collections pattern for the sales on credit is as follows:

60% in the month of sale

40% in the month after of the month of sale

III. Mm’s gross margin rate is 60% of sales

IV. All purchases are on account. Accounts payable arising from merchandise purchases is
paid for as follows:

70% in the month of sale

30% in the month after the month of sales

V. The company desires an inventory at the end of each month equal to 20% of the next
month’s sales in units.

1. The budgeted cash receipt for the month of April is ____________

2. The budgeted purchases of merchandise for February is ________________

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 3. The budgeted cash
disbursements to be made in April for merchandise purchases is __________

4. D corp. is preparing its cash budget for next year. Budgeted sales for four months are as
follows:
April P80,000
May P160,000
June P200,000
July P80,000

20% of total sales are on account. The credit sales is collected in the following manner:

60% in the month of sale

30% one month after the sale
10% two months after the sale

1. How much is the budgeted cash receipt in July?

ITEMS NUMBER 5-10 ARE BASED ON THE FOLLOWING INFORMATION:

Pasol Company has just prepared its master budget for the year 200B. Some of the information
used in the preparation of such budget is as follows:

I. Budgeted sales:

January P 480,000
February 520,000
March 560,000
April 500,000
May 576,000
June 640,000

II. Twenty percent of total sales is cash sales. The collections pattern for the sales on credit is
as follows:

30% in the month of sales

40% in the month after the month of sale
25% in the second month after the month of sale

III. Pasol Company’s gross margin rate is 60% of sales.

IV. Accounts payable arising from merchandise purchases is paid for in the month following the
purchase.
V. The company desires an inventory at the end of each month equal to 30% of the next
month’s sales in units.
VI. The variable operating expenses (other than cost of goods sold) are 10% of sales and are
paid for in the month following the sale.
VII. The annual fixed operating expenses are as follows:

Depreciation P 336,000
Advertising 576,000
Insurance 144,000
Salaries 864,000
Property taxes 192,000

VIII. All of the fixed operating expenses are incurred uniformly throughout the year. Cash fixed

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operating expenses are paid in the
month of incurrence, except for:
o Insurance – paid quarterly in January, April, and July
o Property taxes – paid twice a year in April and October

5. The budgeted cash collections in March for the sales made in March is

a. P246,400 c. P508,800
b. P112,000 d. None of the choices

6. The budgeted cash receipts for the month of April is

a. P522,400 c. P503,200
b. P403,200 d. None of the choices

7. The budgeted purchases of merchandise for February is

a. P212,800 c. P208,000
b. P203,200 d. None of the choices

8. The budgeted cash disbursements for operating expenses (other than cost of goods sold)
during the month of April is

a. P232,000 c. P336,000
b. P204,000 d. None of the choices

9. The budgeted cash disbursements to be made in April for merchandise purchases is

a. P189,120 c. P216,800
b. P524,800 d. None of the choices

10. Assume that the expected cash balance at the beginning of April is P51,600. How much
is the budgeted cash balance as of April 30?

a. (P21,600) c. P554,000
b. P30,000 d. None of the choices

---END OF TOPIC 3---

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TOPIC 4: COMPREHENSIVE EXERCISES FOR OPERATING AND FINANCIAL BUDGET

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Compute for the comprehensive exercises under operating and financial budget.

EXERCISES:

PROBLEM#1
B Inc. manufactures leather bags with 3 zipper type pockets. The company outsources the
zippers at 8 pesos per unit. Each bag requires 5 direct labor hours to produce at a rate of 10
per hour. Budgeted sales of bags for the first quarter of the year and the first month of the
following quarter are as follows:

January 900 units

February 1,000 units
March 1,500 units
April 1,800 units

Inventory data are as follows:

January 1: leather bags 360

Zipper 1,620

End of each month: leather bag 40% of the following month’s budgeted sales
Zippers 60% of the following month’s production requirement

1. What is the budgeted production of leather bag for the first quarter?
2. What is budgeted purchases of zipper for February?
3. What is the budgeted zipper and labor cost for the month of March?
4. Assume that on the average, a full-time factory worker works 188 hours per month and no
overtime is allowed, how many full time equivalent workers are needed to produce the
budgeted of leather bags in January?

PROBLEM#2
Ferry Toy produces and sells toy ships. For the month of May, it expects to sell 20,100 units of
its passenger ship model SFI at ₱600 each. Each unit of SFI requires three component parts as
follows:

Component Part Code Units required Purchase Price

per SFI
Body BO 1 ₱30
Motor assembly MA 1 60
Body accessories BA 10 20

The variable conversion cost for each unit of SFI amounts to ₱170. Fixed factory overhead per
unit is ₱50, based on the company’s normal monthly capacity of 25,000 units of SFI.

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Ferry Toy uses the standard absorption costing method for valuing inventories, Beginning and
ending inventories for the month of May are as follows:

May 1 May 31
Units SFI 600 500
BO 1,050 450
MA 1,600 600
BA 7,000 3,000

1. The budgeted production of SFI for the month of May is ________.

2. The total budgeted cost of all purchased components for the month of May is _______.
3. The book value of the desired May 31 inventories is ________.
4. Ferry Toy’s budgeted gross margin from SFI for the month of May is ________.

PROBLEM#3
Pinuga Corporation is preparing its factory overhead cost budget for the third quarter of 200B.
The management plans to produce 200,000 units for the said quarter. Past experience has
shown that the company’s product is produced at the rate of 4 units per hour. Variable rates
per direct labor hour are as follows:

Indirect materials and supplies ₱0.76

Power 1.36
Repairs and maintenance 2.80
Other variable overhead 0.96
Total ₱5.88

Total fixed overhead cost is budgeted at ₱147,200. For product costing purposes, a fixed factory
overhead rate of ₱3.20 per direct labor hour has been established.

1. How much is the total budgeted factory overhead for the quarter?
2. The total factory overhead cost per unit of product is?
3. How much is the expected capacity variance?

PROBLEM#4
Pasol Company has just prepared its master budget for the year 200B. Some of the information
used in the preparation of such budget is as follows:

1. Budgeted sales: January ₱480,000

February 520,000
March 560,000
April 500,000
May 576,000
June 640,000

2. Twenty percent of total sales is cash sales. The collections pattern for the sales on credit is
as follows:

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 30% in the month of sale
40% in the month after the month of sale
25% in the second month after the month of sale

3. Pasol Company's gross margin rate is 60% of sales.

4. Accounts payable arising from merchandise purchases is paid for in the month following the
purchase.
5. The company desires an inventory at the end of each month equal to 30% of the next month's
sales in units.
6. The variable operating expenses (other than cost of goods sold) are 10% of sales and are
paid for in the month following the sale.
7. The annual fixed operating expenses are as follows:

Depreciation ₱336,000
Advertising 576,000
Insurance 144,000
Salaries 864,000
Property taxes 192,000

8. All of the fixed operating expenses are incurred uniformly throughout the year. Cash fixed
operating expenses are paid in the month of incurrence, except for:
• Insurance — paid quarterly in January, April, and July
• Property taxes - paid twice a year in April and October

A. The budgeted cash collections in March for the sales made in March is ______.
B. The budgeted cash receipts for the month of April is ________.
C. The budgeted purchases of merchandise for February is ________.
D. The budgeted cash disbursements for operating expenses (other than cost of goods sold)
during the month of April is ________.
E. The budgeted cash disbursements to be made in April merchandise purchases is ______.
F. Assume that the expected cash balance at the beginning of April P51,600. How much is the
budgeted cash balance as of April 30?

PROBLEM#5
Trader’s Inc. uses accrual accounting. Its statement of financial position as of the end of the
third quarter of the calendar year 200B is shown in the following page:

TRADER’S INC.
Statement of Financial Position
September 30, 200B

Assets Liabilities and Equity

Cash ₱416,000 Accounts payable ₱1,400,000
Accounts receivable, net 1,200,000 Capital stock 7,200,000
Merchandise Inventory 2,520,000 Retained Earnings 7,536,000
Non-current Assets 8,000,000

Total Assets ₱12,136,000 Total liabilities and ₱12,136,000

stockholder’s equity

Additional information:
• Budgeted sales for October is ₱4,160,000; for November, ₱4,000,000.

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 • Gross profit rate is 20%.
• Of the total sales, 40% is on credit which the company collects in the month following the
month of sale.
• Purchases in each month are composed of:
80% of the coming month’s requirement
20% of the current month’s requirement
• Purchases are paid for in the month following the month of purchase.

A. The budgeted cash collections for the month of October is __________.

B. Budgeted purchases during October is _________.
C. The budgeted gross profit for the month of October is _________.

---END OF PRELIM MODULE---

References:
Reviewer in Management Advisory Services (RODELIO S. ROQUE, BSBAA,CPA)
Reviewer in Management Advisory Services (FRANKLIN T. AGAMATA,
MBA,CPA) www.investopedia.com
www.toptal.com

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