Budgeting MODULE 8 - BUDGETING 4. Which of the following is least likely a reason why a company prepares its budget? A. To provide a basis for comparison of actual performance B. To communicate the company’s plans throughout the entire business organization C. To control income and expenditure in a particular period. D. To make sure the company expands its operations. THEORIES: Basic Concepts 1. The concept of “management by exception” refers to management’s consideration of A. only those items that vary materially from expectations. B. only rare events. C. samples selected at random. D. only significant unfavorable deviations. 5. Which of the following does not contribute to an effective budgeting? A. Top management is involved in budgeting. B. To give each manager a free hand in the preparation of the budget, the data within the master budget are flexible. C. The organization is divided into responsibility units. D. There is communication of results. 8. A formal written statement of management’s plans for the future, packaged in financial terms, is a: A. Responsibility report. C. Cost of production report. B. Performance report. D. Budget. 6. The budgets that are based on a very high levels of performance, like expected costs using ideal standards, A. assist in planning the operations of the company B. stimulate people to perform better than they ordinarily would C. are helpful in evaluating the performance of managers D. can lead to low levels of performance 2. Budgets are related to which of the following management functions? A. Planning C. Control B. Performance evaluation D. all of these 22. Budgeting supports the planning process by encouraging all of the following activities except: A. Requiring all organizational units to establish their goals for the coming period. B. Increasing the motivation of managers and employees by providing agreed-upon expectations. C. Improving overall decision making by considering all viewpoints, options, and cost control programs. D. Directing and coordinating operations during the period. 7. Which of the following statements is incorrect? A. An imposed budget is the same as a participative budget. B. Preparation of the budget would be the responsibility of each responsibility unit. C. Top management’s support is necessary to promote budget participation. D. The top management should review and approve each responsibility unit’s budget. 3. Which of the following advantages does a budget mostly provide? A. Coordination is increased. B. Planning is emphasized. C. Communication is continuous. D. Comparison of actual versus budgeted data. 9. The primary role of the budget director and the budgeting department is to A. Settle disputes among operating executives during the development of the annual operating plan. B. Develop the annual profit plan by selecting the alternatives to be adopted form the suggestions submitted by the various operating segments. C. Compile the budget and manage the budget process. D. Justify the budget to the corporate planning committee of the board of directors. 24. Which of the following is NOT an advantage of budgeting? A. It forces managers to plan. B. It provides resource information that can be used to improve decision making. C. It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent evaluation of performance. D. It provides organizational independence. 10. The primary variable affecting active participation and commitment to the budget and the control system is A. Management efforts to achieve the budget rather than optimize results. B. The rigid adherence to the budget without recognizing changing conditions. 433 Budgeting C. Top management involvement in support of the budget. D. The opportunity budgeting gives to risk-taker managers for department growth. 11. The process of developing budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as: A. Forecasting. C. Continuous budgeting. B. Zero-based budgeting. D. Program budgeting. 12. A variant of fiscal-year budgeting whereby a twelve-month projections into the future is maintained at all times: A. Forecasting. C. Continuous budgeting. B. Zero-based budgeting. D. Calendar budgeting. 38. Which of the following is a contemporary approach to budgeting? A. incremental approach C. baseline approach B. zero-based approach D. both a and b are true 35. The method of budgeting which adds one month’s budget to the end of the plan when the current month’s budget is dropped from the plan refers to A. Long-term budget C. Incremental budget B. Operations budget D. Continuous budget 51. Zero-base budgeting requires managers to A. Justify expenditures that are increases over the prior period’s budgeted amount. B. Justify all expenditures, not just increases over last year’s amount. C. Maintain a full-year budget intact at all times. D. Maintain a budget with zero increases over the prior period. 27. A continuous budget A. is a budget that is revised monthly or quarterly. B. is a medium term plan that consists of more than 2 years’ projections. C. is appropriate only for use of a not-for-profit entity. D. works best for an entity that can reliably forecast events a year or more into the future. 13. Zero-based budgeting: A. involves the review of changes made to an organization’s original budget. B. does not provide a summary of annual projections. C. involves the review of each cost component from a cost/benefit perspective. D. emphasizes the relationship of effort to projected annual revenues. 37. “Incremental budgeting” refers to A. line-by-line approval of expenditures B. setting budget allowances based on prior year expenditures C. requiring top management approval of increases in budgets D. using incremental revenues and costs in budgeting 18. A systematized approach known as zero-based budgeting: A. Classifies the budget by the prior year’s activity and estimates the benefits arising from each activity. B. Commence with either the current level of spending or projected whichever is lower. C. Presents planned activities for a period of time but does not present a firm commitment. D. Divides the activities of individual responsibility centers into a series of packages that are prioritized. 49. A budget plan for annual fixed costs that arises from top management decisions directly reflecting corporate policy. A. Flexible budget. C. Discretionary budget. B. Static budget. D. Program budget. 36. The term “decision package” relates to A. comprehensive budgeting B. zero-based budgeting 20. Which of the following statements about Zero-based budgeting is incorrect? A. All activities in the company are organized into break-up units called packages. B. All costs have to be justified every budgeting period. C. The process is not time consuming since justification of costs can be done as a routine matter. D. Zero-based budgeting includes variable costs only. C. program budgeting D. line budgeting 41. The budget approach that is more relevant when the continuance of an activity or operation must be justified on the basis of its need or usefulness to the organization. A. the incremental approach C. the baseline approach B. the zero-based approach D. both a and b are true 34. Budgeting expenditures by purpose is called A. program budgeting 434 C. zero-based budgeting Budgeting B. line budgeting D. flexible budgeting B. Flexible budget allows management latitude in meeting goals whereas a master budget is based on a fixed standard. C. Master budget is for an entire production facility but a flexible budget is applicable to single department only. D. Master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range 28. A static budget is not appropriate in evaluating a manager's effectiveness if a company has A. substantial fixed costs. B. substantial variable costs. C. planned activity levels that match actual activity levels. D. no variable costs. 47. Which of the following is a difference between a static budget and a flexible budgets? A. A flexible budget includes only variable costs; a static budget includes only fixed costs. B. A flexible budget includes all costs, a static budget includes only fixed costs. C. A flexible budget gives different allowances for different levels of activity, a static budget does not. D. There is no difference between the two. 45. Flexible budgeting is a reporting system wherein the A. Budget standards may be adjusted at management’s discretion. B. Planned level of activity is adjusted to the actual level of activity before the performance report is prepared. C. Reporting dates vary according to the managerial levels of the users. D. Packages of activities vary from period to period. 17. A system that classifies budget requests by activity and estimates the benefits arising from each activity: A. Incremental budgeting system. B. Static budgeting system. C. Program planning and budgeting system. D. Participative system. 15. A budget that presents the plan for a range of activity so that the plan can be adjusted for changes in activity levels is referred to as: A. Zero-based budgeting. B. Continuous budgeting. C. Flexible budgeting. D. Program planning and budgeting system. 21. A budget that identifies revenues and costs with an individual controlling their incurrence is A. Master budget C. Product budget B. Responsibility budget D. None of the above 16. A flexible budget is A. one that can be changed whenever a manager so desires B. adjusted to reflect expected costs at the actual level of activity C. one that uses the formula total costs = cost per unit x units produced D. the same as a continuous budget 25. The difference between an individual's submitted budget projection and his or her best estimate of the item being projected is an example of A. padding the budget B. adhering to zero-based budgeting assumptions C. creating budgetary slack D. being incongruent with participative budgeting 26. A series of budgets for varying levels of activity is a: A. Variable cost budget. C. Master budget. B. Flexible budget. D. Zero-based budget. 48. If a company wishes to establish a factory overhead budget system in which estimated costs can be derived directly from estimates of activity levels, it should prepare a A. flexible budget. C. Discretionary budget. B. Program budget. D. Manufacturing budget. 43. Budget slack is a condition in which A. Demand is low at various times of the year B. Excess machine capacity exists in some areas of the plant C. There is an intentional overestimate of expenses or an underestimate of revenues D. Managers grant favored employees extra time-off 46. The basic difference between a master budget and a flexible budget is that a A. Flexible budget considers only variable costs but a master budget considers all costs. 39. The procedure for setting profit objectives in which the determination of profit objectives is 435 Budgeting subordinated to the planning, and the objectives emerge as the product of the planning itself is the A. a priori method C. practical method B. theoretical method D. a posteriori method B. a forecast of operating expenses and related revenues. C. a forecast of units of production. D. concerned with the income-generating activities of a firm. 54. What is the proper preparation sequencing of the following budgets? 1. Budgeted Balance Sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted Income Statement A. 1, 2, 3, 4 C. 2, 3, 4, 1 B 2, 3, 1, 4 D. 2, 4, 1, 3 40. The procedure for setting profit objectives in which management specifies a given rate of return that it seeks to realize in the long run by means of planning toward that end is the A. a priori method C. pragmatic method B. theoretical method D. ad hoc method 50. Budgeting process in which information flows top down and bottom up is referred to as: A. Continuous budgeting. C. Perpetual budgeting B. Participative budgeting D. Joint budgeting 29. In estimating the sales volume for a master budget, which of the following techniques may be used to improve the projections? A. Brainstorming. B. Statistical analysis. C. Estimating from previous sales volume. D. All of these are useful. 42. Which of the following is not a potential problem with participative budgeting? A. setting standards that are either too high or too low B. padding the budget C. build slack into the budget D. all of the above are potential problems 30. Using the concept of ‘expected value” in sales forecasting means that the sales forecast to be used is A. developed using the indicator method B. the sum of the sales expected by individual managers C. based on expected selling prices of the products D. based on probabilities 33. The ideal financial planning process would be A. top-down planning. B. bottom-up planning. C. a combination of top-down and bottom-up planning. D. None of the above 44. A common starting point in the budgeting process is A. expected future net income. C. to motivate the sales force. B. past performance. D. a clean slate, with no expectations. 31. Several sales forecasts are available from different sources and the managers have good ideas about their likelihoods. This situation call for the use of A. the expected value concept C. indicator methods B. historical analysis D. a scatter diagram 57. Which one of the following is an external factor that would need to be considered in forming an initial budget proposal? A. changes in product design B. introduction of a new product C. competitors' actions D. adoption of a new manufacturing process 53. An overly optimistic sales budget may result in A. increases in selling prices late in the year. B. insufficient inventories. C. increased sales during the year. D. excessive inventories. 14. Operating budgets are A. a forecast of expected operating expenses. 56. Which of the following budgets provides the data for the preparation of the direct labor cost budget? 436 Budgeting A. Direct materials purchase budget. B. Cash budget. C. Sales budget. D. Production budget. PROBLEMS: Cost estimation formula i. Management has prepared a graph showing the total costs of operating branch warehouses throughout the country. The cost line crosses the vertical axis at P400,000. The total cost of operating one branch is P650,000. The total cost of operating ten branches is P2,900,000. For purposes of preparing a flexible budget based on the number of branch warehouses in operation, what formula would be used to determine budgeted costs at various levels of activity? A. Y = P400,000 + P250,000X C. Y = P650,000 + P400,000X B. Y = P400,000 + P290,000X D. Y = P650,000 + P250,000X 55. The increased use of automation and less use of the work force in companies has caused a trend towards an increase in A. both variable and fixed costs. B. fixed costs and a decrease in variable costs. C. variable costs and a decrease in fixed costs. D. variable costs and no change in fixed costs. 32. In preparing a cash budget, which of the following is normally the starting point for projecting cash requirements? A. Fixed assets. C. Accounts receivable. B. Sales. D. Inventories. Sales budget Purchases budget – merchandising concern ii. PTO Company desires an ending inventory of P140,000. It expects sales of P800,000 and has a beginning inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases are A. P 530,000 C. P 810,000 B. P 790,000 D. P1,070,000 52. Recognition of the many uncertainties in budgeting is exemplified by companies normally A. forecasting sales B. establishing minimum required cash balances C. forecasting only fixed costs D. omitting expected dividend payments from budgeted disbursements iii. Calypso Co. has projected sales to be P600,000 in January, P750,000 in February, and P800,000 in March. Calypso wants to have 50% of next month’s sales needs on hand at the end of a month. If Calypso has an average gross profit of 40%, what are the February 28 purchases? A. P465,000 C. P775,000 B. P310,000 D. P428,000 19. Which of the following statements is True? A. Under zero-based budgeting, a manager is required to start at zero budget levels each period, as if the programs involved were being initiated for the first time. B. The primary purpose of the cash budget is to show the expected cash balance at the end of the budget period. C. Budget data are generally prepared by top management and distributed downward in an organization. D. The budget committee is responsible for preparing detailed budget figures in an organization. iv. Blue Company budgeted purchases of P100,000. Cost of sales was P120,000 and the desired ending inventory was P42,000. The beginning inventory was A. P20,000 C. P42,000 B. P32,000 D. P62,000 23. Which of the following is a valid statement? A. Responsibility budget identifies revenue and costs with the individual responsible for their incurrence. B. The best way to establish budget figures is to use last year’s actual cost and activity data as this year’s budget estimates. C. A sales budget and a sales forecast are the same thing. D. The primary purpose of the cash budget is to show the expected cash balance at the end of the budget period. v. The payment schedule of purchases made on account is: 60% in the time period of purchase, 30% in the following time period, and 10% in the subsequent time period. Total credit purchases were P200,000 in May, and P100,000 in June. Total payments on credit purchases were P140,000 in June. What were the credit purchases in the month of April? A. P200,000 C. P145,000 B. P100,000 D. P215,000 Production budget 437 Budgeting vi. Montalban Company’s sales budget shows the following expected sales for the following year: Quarter Units First 120,000 Second 160,000 Third 90,000 Fourth 110,000 Total 480,000 The inventory at December 31 of the prior year was budgeted at 36,000 units. The quantity of finished goods inventory at the end of each quarter is to equal 30% of the next quarter’s budgeted sales of units. How much should the production budget show for units to be produced during the first quarter? A. 48,000 C. 132,000 B. 96,000 D. 144,000 What are the respective peso amounts of each material to be used in production during the year? Material LL Material MM Material NN A. P181,200 P1,026,800 P724,800 B. P181,200 P1,026,800 P746,400 C. P186,600 P1,057,400 P746,400 D. P186,600 P1,057,400 P724,800 Raw materials purchases budget x. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are desired for inventory at December 31, and 180,000 pounds are required for annual production, how many pounds of raw material should be purchased during the year? A. 150,000 pounds C. 120,000 pounds B. 240,000 pounds D. 210,000 pounds vii. Lorie Company plans to sell 400,000 units of finished product in July an 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 300,000 finished units in the inventory on June 30. Each unit of finished product requires four pounds of direct materials at a cost of P2.50 per pound. There are 800,000 pounds of direct materials in the inventory on June 30. How many units should be produced for the three-month period ending September 30? A. 1,260,000 C. 1,331,440 B. 1,328,000 D. 1,424,050 xi. Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods at 75% the coming month’s budgeted sales. It also keeps its inventory of raw materials at 50% of the coming month’s budgeted production. Each unit of product requires two pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; august, 1,600. Raw material purchases in July would be A. 1,525 pounds C. 2,550 pounds B. 2,900 pounds D. 3,050 pounds xii. Each unit of finished product uses 6 kilograms of raw materials. The production and inventory budgets for May 2007 are as follows: Beginning Inventory: Finished goods 15,000 units Raw materials 21,000 kg. Budgeted unit sales 18,000 units Planned ending inventory Finished goods 11,400 units Raw materials 24,400 kg. 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. How many kilograms of raw materials should be purchased in June? A. 89,800 C. 96,000 B. 98,440 D. 99,400 Ending inventory budget viii. If the required direct materials purchases are 8,000 pounds and the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct material in pounds? A. 20,000 C. 12,000 B. 4,000 D. 32,000 Raw materials usage budget ix. Minerva Company sells a single product. Budgeted sales for the year are anticipated to be 640,000 units. The estimated beginning and ending finished goods inventory are 108,000 and 90,000, respectively. A production of one unit requires the following materials: Material LL 0.50 lb. @ P0.60 Material MM 1.00 lb. @ P1.70 Material NN 1.20 lb. @ P1.00 xiii. Violet Company manufactures a single product. It keeps its inventory of finished goods at twice 438 Budgeting the coming month’s budgeted sales, inventory of raw materials at 150% of the coming month’s budgeted production requirements. Each unit of product requires two pounds of materials. The production budgets in units consist of the following:. May 1,000 June 1,200 July 1,300 August 1,600 Raw material purchases in June would be A. 2,600 pounds C. 2,400 pounds B. 1,800 pounds D. 2,700 pounds Third 40,000 units Fourth 65,000 units Each unit of product requires 2.5 kilograms of direct materials. The company begins each quarter with inventory of direct materials equal to 25 percent of the total quarter’s material requirements. What is the budgeted purchases of materials for the second quarter? A. 113,750 C. 46,250 B. 109,375 D. 112,500 Indirect labor costs xvii. Namuco, Inc. uses flexible budgeting for cost control. During the month of September, Namuco, Inc. produced 14,500 units of finished goods with indirect labor costs of P25,375. Its annual master budget reflects an indirect labor costs, a variable cost, of P360,000 based on an annual production of 200,000 units. In the preparation of performance analysis for the month of September, how much flexible budget should be allowed for indirect labor costs? A. P30,000 C. P25,375 B. P29,167 D. P26,100 xiv. Sales Company is budgeting sales of 300,000 units of its only product for the coming year. Production of one unit of product requires three pounds of Material Q and 2 pounds of Material L. Inventory units at the beginning of the year are: Actual, Jan. 1 Budgeted, Dec 31 Finished goods 60,000 50,000 Material Q 80,000 60,000 Material L 88,000 96,000 How many pounds of Material Q is Sales planning to buy during the coming year? A. 850,000 C. 862,000 B. 890,000 D. 908,000 Cash receipts budget Sales xviii.Generous Company began its operations on January 1 of the current year. Budgeted sales for the first quarter are P240,000, P300,000, and P420,000, respectively, for January, February and March. Generous Company expects 20% of its sales cash and the remainder on account. Of the sales on account, 70% are expected to be collected in the month of sale, 25% in the month following the sale, and the remainder in the following month. How much should Generous receive from sales in March? A. P304,800 C. P388,800 B. 294,000 D. P295,200 xv. Strama Company prepares its budgets on annual basis. The following beginning and ending inventory unit levels are planned for the fiscal year of June 1, 2006 through May 31, 2007. June 1, 2006 May 31, 2007 Raw material* 40,000 50,000 Work-in-process 10,000 10,000 Finished goods 80,000 50,000 *Two (2) units of raw material are needed to produce each unit of finished product. If 500,000 finished units were to be manufactured during the 2006-2007 fiscal year by Strama Company, the units of raw material needed to be purchased would be A. 1,000,000 units C. 1,020,000 units B. 1,010,000 units D. 990,000 units Credit sales xix. Mendrez Company has a collection schedule of 60% during the month of sales, 15% the following month, and 15% subsequently. The total credit sales in the current month of September were P80,000 and total collections in September were P57,000. What were the credit sales in July? A. P90,000 C. P45,000 B. P30,000 D. P32,000 xvi. Diliman Corporation includes the following quarterly budget for production: Quarter Production First 60,000 units Second 45,000 units Cash collections xx. Obligacion Company has P299,000 in accounts receivable on January 1, 2006. Budgeted 439 Budgeting sales for January are P860,000. Obligacion expects to sell 20% of its merchandise for cash. Of the remaining sales, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are: A. P815,000 C. P471,000 B. P691,000 D. P987,000 B. P230,000 D. P251,400 xxiii.The Le Amore Company had the following budgeted sales for the first half of the current year: Cash Sales Credit Sales January P70,000 P340,000 February 50,000 190,000 March 40,000 135,000 April 35,000 120,000 May 45,000 160,000 June 40,000 140,000 xxi. Adel Company has the following sales forecasts for the selected three-month period in 2007: Month Sales April P12,000 May 7,000 June 8,000 Seventy percent of sales are collected in the month of the sale, and the remainder is collected in the following month. Accounts receivable balance (April 1, 2007) P10,000 Cash balance (April 1, 2007) 5,000 Minimum cash balance is P5,000. Cash can be borrowed in P1,000 increments from the local bank (assume no interest charges). How much cash would be collected in June from sales? A. P 7,700 C. P 8,000 B. P 8,500 D. P10,000 The company is in the process of preparing a cash budget and must determine the expected cash collections by month. To this end, the following information has been assembled: Collections on sales: 60% in month of sale 30% in month following sale 10% in second month following sale The accounts receivable balance on January 1 of the current year was P70,000, of which P50,000 represents uncollected December sales and P20,000 represents uncollected November sales. The total cash collected by Le Amore Company during the month of January would be: A. P410,000 C. P344,000 B. P254,000 D. P331,500 xxii. The Avelina Company has the following historical pattern on its credit sales. 70 percent collected in month of sale 15 percent collected in the first month after sale 10 percent collected in the second month after sale 4 percent collected in the third month after sale 2 percent uncollectible The sales on open account have been budgeted for the last six months of 2007 are shown below: July P 60,000 August 70,000 September 80,000 October 90,000 November 100,000 December 85,000 The estimated total cash collections during the fourth calendar quarter from sales made on open account during the fourth calendar quarter would be A. P172,500 C. P265,400 Accounts receivable balance xxiv. As of January 1, 2007, the Liberal Sales Company had an account receivable of P500,000. The sales for January, February, and March were as follows: P1,200,000, P1,400,000 and P1,500,000, respectively. Of each month’s sales, 80% is on account. 60% of account sales is collected in the month of sale, with remaining 40% collected in the following month. What is the accounts receivable balance as of March 31, 2007? A. P720,000 C. P587,200 B. P480,000 D. P600,000 Credit to accounts receivable xxv. Ironman Company is preparing its cash budget for the month ending November 30. The following information pertains to Ironman’s past collection experience from its credit sales: Current month’s sales 12% Prior month’s sales 75% 440 Budgeting Sales two months prior to current month 6% Sales three months prior to current month 4% Cash discounts (2/30, net/90) 2% Doubtful accounts 1% Credit sales: November – estimated P2,000,000 October 1,800,000 September 1,600,000 August 1,900,000 How much is the estimated credit to Accounts Receivable as a result of collections expected during November? A. P1,730,200 C. P1,762,000 B. P1,757,200 D. P1,802,000 B. P1,600,000 D. P1,760,000 xxviii. Albatross Company started its commercial operations on September 30 of the current year. Projected manufacturing costs for the first three months of operations are P1,568,000, P1,952,000, and P2,176,000, respectively. Depreciation, insurance, and property taxes represent P288,000 of the estimated manufacturing costs. Insurance was paid on September 30, and property taxes will be paid in July next year. Seventy-five percent of the remainder of the manufacturing costs are expected to be paid in the month in which they are incurred, with the balance to be paid in the following month. The cash payments for manufacturing costs in the month of November are: A. P1,568,000 C. P1,664,000 B. P1,952,000 D. P1,856,000 Ending cash balance xxix. Albania Company expects its June sales to be P300,000, which is 25% higher than its May sales. Purchases were P200,000 in May and are expected to be P240,000 in June. All sales are on credit and are collected as follows: 80% in the month of the sale and 20% in the following month. All payments in the month of sales are given 2% discount. Sixty percent of purchases are paid in the month of purchase to take advantage of purchase term of 1/10, n/40. The remaining amount is paid in the following month. The beginning cash balance on June 1 is P20,000. The ending cash balance on June 30 would be: A. P64,160 C. P80,640 B. P73,000 D. P85,440 Increase in accounts receivable xxvi. Lazaro Company will open a new store on January 1. Based on experience from its other retail outlets, Lazaro is making the following sales projections: Cash Sales Credit Sales January P600,000 P400,000 February 300,000 500,000 March 400,000 600,000 April 400,000 800,000 Lazaro estimates that 70% of the credit sales will be collected in the month following the month of the sale, with the balance collected in the second month following the sale. Based on these data, the balance in accounts receivable on January 31 will be increased by A. 400,000 C. P120,000 B. P280,000 D. P580,000 Comprehensive Question Nos. 30 through 33 are based on the following information: Apollo Merchandiser asks your services to develop cash and other budget information for the first quarter of 2007. In December 31, the store had the following balance: Cash P 55,000 Accounts receivable 4,370,000 Inventories 3,094,000 Accounts payable 1,330,550 Cash disbursements xxvii. Cascades Company, a merchandising firm, is preparing its master budget and has gathered the following data to help budget cash disbursements: Budgeted data: Cost of goods sold P1,680,000 Desired decrease in inventories 70,000 Desired decrease in Accounts Payable 150,000 All of the accounts payables are for inventory purchases and all inventory items are purchased on account. What are the estimated cash disbursements for inventories for the budget period? A. P1,460,000 C. P1,900,000 The following information are relevant to 2007 operations: Sales: a. Each month’s sales are billed on the last day of the month. b. Customers are allowed a 3 percent discount if payment is made within 10 days after the billing date. Receivables are booked gross. c. Sixty percent of the billings are collected within the discount period, twenty-five percent 441 Budgeting are collected by the end of the month, nine percent are collected by the end of the second month, and six percent are considered entirely uncollectible. Sales Purchases January P7,200,000 P4,200,000 February 6,600,000 4,800,000 March 6,000,000 3,600,000 April 7,800,000 5,400,000 Rajah collects 70% of sales is collection during the month of sale, 20% the following month and 9% in the second month. 1% of sales are deemed uncollectible. Purchases: 1. Fifty four percent of all purchases and selling, general, and administrative expenses are paid in the month purchased and the remainder in the following month. 2. Each month’s units of ending inventory is equal to one hundred thirty percent of the next month’s units of sales. 3. The cost of each unit of inventory is P200. 4. Selling, general, and administrative expenses, of which P20,000 is depreciation, are equal to fifteen percent of the current month’s sales. In order to fully avail of the 2% discount, Rajah pays all the purchases by the tenth of the month following the month of purchase. Actual and projected sales are as follows: November December January February March April UNITS 11,800 12,100 11,900 11,400 12,000 12,200 Sales for the month of May are expected to be P6,600,000 and the amount of purchases are P6,000,000. Operating expenses to be paid during the month of May will be P1,440,000 and the cash balance by May 1 is P2,200,000. PESOS P3,540,000 3,630,000 3,570,000 3,420,000 3,600,000 3,660,000 The Atlanta Corporation has forecast the following sales for the first seven months of the year: January February March April xxx. The respective amounts of budgeted purchases for the months of January and February are: A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000 B. P2,380,000 and P2,280,000 D. P3,570,000 and P3,420,000 P120,000 160,000 180,000 240,000 May June July P120,000 200,000 220,000 Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labor costs will run P60,000 per month, and fixed overhead is P30,000 per month. Interest payments on the debt will be P45,000 for both March and June. Finally, Atlanta’s sales force will receive a 3 percent commission on total sales for the first six months of the year, to be paid on June 30. xxxi. The budgeted cash disbursements for the month of February are: A. P2,929,000 C. P2,949,000 B. P2,873,790 D. P2,853,790 xxxii. The amount of cash collected from sales during the month of January is: A. P3,338,760 C. P3,404,100 B. P3,551,160 D. P3,556,560 xxxiv. How much will be paid in the month of January for the purchase of materials? A. P 27,200 C. P137,856 B. P117,200 D. P 33,600 xxxiii. The number of units to be purchased during the month of March is: A. 15,860 C. 12,000 B. 12,260 D. 15,600 xxxv. How much does Atlanta plan to disburse in the month of June? A. P 41,600 C. P207,200 B. P100,000 D. P117,200 Rajah Enterprises is a growing retailer of home care products. During the first four months of the following year, it forecasts the following sales and purchases: Question Nos. 36 through 38 are based on the following: 442 Budgeting Super Sales’ actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. April (Actual) May (Actual) June (forecast) July (forecast) August (forecast) September (forecast) Sales P390,000 420,000 390,000 350,000 420,000 410,000 Question Nos. 39 through 45 are based on the following data: The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand. Irine Tee, the major stockholder, manages the inventory and finances of the company. She estimates sales for the following months to be: Purchases P200,000 220,000 210,000 240,000 320,000 230,000 January February March April May P263,500 P186,000 P217,000 P310,000 P387,500 (1,700,000 fasteners) (1,200,000 fasteners) (1,400,000 fasteners) (2,000,000 fasteners) (2,500,000 fasteners) Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December (1,500,000 fasteners). The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 30 percent are collected in the month after the sale and 70 percent are collected two months after. Super Sales pays for 45 percent of its purchases in the month after purchase and 55 percent two months after. Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for the first quarter. Based on her sales forecast and the following information she has provided, you have to prepare a monthly cash budget, a monthly and quarterly pro forma income statement, a pro forma quarterly balance sheet, and all necessary supporting schedules for the first quarter. Labor expense equals 15 percent of the current month's sales. General overhead expense equals P10,000 per month. Interest payments of P35,000 are due in June and September. A cash dividend of P25,000 is scheduled to be paid in June. Tax payments of P30,000 are due in June and September. There is a scheduled purchase for cash of an equipment, P290,000 in September. Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale). It pays for its materials 30 days after receipt. In general, Ms. Tee likes to keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was not equal to her desired two-month supply.) Super Sales’ ending cash balance in May is P25,000. The minimum desired cash balance is P20,000. The maximum desired cash balance is P50,000. Excess cash (above P50,000) is used to buy marketable securities. Marketable securities are sold before borrowing funds in case of a cash shortfall (less than P20,000). The major cost of production is the purchase of raw materials in the form of steel rods, which are cut, threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms. Tee has just been notified that material costs have risen, effective January 1, to P60 per 1,000 fasteners. The Ingo Corporation uses FIFO inventory accounting. Labor costs are relatively constant at P20 per thousand fasteners, since workers are paid on a piecework basis. Overhead is allocated at P10 per thousand units, and selling and administrative expense is 20 percent of sales. Labor expense and overhead are direct cash outflows paid in the month incurred, while interest and taxes are paid quarterly. xxxvi. During the month of June, Super Sales expects to receive cash from sales amounting to: A. P606,000 C. P398,100 B. P408,900 D. P359,100 xxxvii. The cumulative amount of marketable securities purchased as of July 31 amounts to: A. P126,000 C. P143,300 B. 132,500 D. P 0 The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash into marketable securities. The average tax rate is 40 percent, and the company usually pays out 50 percent of net income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a cash shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is paid in March, as are taxes and dividends. xxxviii. The amount of loan to be obtained to maintain a balance of P50,000 cash as of September 30 will be: A. P109.4 C. P 9.4 B. P 59.4 D. P 0.0 443 Budgeting xliii. The cost of goods sold for the first quarter of the coming year amounts to: A. P363,800 C. P426,400 B. P453,600 D. P373,400 As of year-end, the Ingo Corporation balance sheet was as follows: Ingo Corporation Balance Sheet December 31, 2006 ASSETS Current assets: Cash Accounts receivable Inventory Total current assets Plant and equipment, net of accumulated depreciation of P200,000 Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable Long-term debt, 8% Common stock Retained earnings Total Liabilities and Stockholders’ Equity xliv. The total cash and marketable securities as of January 31 will be: A. P45,450 C. P91,800 B. P25,000 D. P54,450 P 30,000 320,000 237,800 587,800 800,000 P1,387,800 xlv. The expected net income during the first quarter of the coming year is: A. P 91,080 C. P 96,840 B. P161,400 D. P151,800 Question Nos. 46 through 48 are based on the Russon Corporation, a retailer whose sales are all made on credit. Sales are billed twice monthly, on the 10th of the month for the last half of the prior month’s sales, and on the 20th of the month for the first half of the current month’s sales. The terms of all sales are 2/10, net 30. Based upon past experience, the collection of accounts receivable is as follows: P 93,600 400,000 504,200 390,000 P1,387,800 Within the discount period On the 30th day Uncollectible xxxix. The budgeted production respective to each month of the first quarter of the coming year are: A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000 B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000 80% 18% 2% xli. The expected cash collections on accounts receivable in the month of February are: A. P224,750 C. P 93,000 B. P248,000 D. P186,000 Russon’s average markup on its products is 20% of the sales price. All sales and purchases occur uniformly throughout the month. The sales value of shipments for May and the forecasts for the next four months follow: May (actual) P500,000 June 600,000 July 700,000 August 700,000 September 400,000 Russon purchases merchandise for resale to meet the current month’s sales demand and to maintain a desired monthly ending inventory of 25% of the next month’s sales. All purchases are on credit with terms of net/30. Russon pays for 50% of a month’s purchases in the month of purchase and 50% in the month following the purchase. xlii. The amount of accounts receivable outstanding as of March 31, 2007 is: A. P217,000 C. P310,000 B. P224,750 D. P108,500 xlvi. How much cash can Russon plan to collect in September from sales made in August? A. P337,400 C. P400,400 B. P343,000 D. P280,000 xl. The amount of accounts payable paid in March for the purchase of materials is: A. P150,000 C. P104,000 B. P120,000 D. P130,000 444 Budgeting xlvii.The budgeted peso value of Russon’s inventory on August 31 will be A. P110,000 C. P112,000 B. P 80,000 D. P100,000 i. xlviii. How much cash can Russon plan to collect from accounts receivable during July? A. P574,000 C. P619,000 B. P662,600 D. P608,600 May (P200,000 x 0.30) Payments applicable to April purchase Credit purchase in April: P20,000 0.10 Answer: A The amount of fixed costs in operating branches’ 10 warehouses is P400,000 (the fixed cost line intercepts the vertical axis). Total operating costs P2,900,000 Less fixed costs 400,000 Total variable costs (10 warehouses) P2,500,000 Variable costs per branch: P2,500,000 10 P 250,000 ii. Answer: A Cost of units sold (0.65 x P800,000) Add Desired ending inventory Total cost of goods available for sale Deduct Beginning inventory Budgeted purchases iii. Answer: A Cost of goods sold Add Ending Inventory Total available for sale Deduct Beginning inventory Budgeted purchases, February Budgeted sales, First Quarter Add Required Ending Finished goods: Total units required Less Beginning Finished goods Budgeted production in units iv. Answer: D Cost of sales Add Desired ending inventory Total available for sale Deduct Budgeted purchases Beginning inventory P120,000 42,000 162,000 100,000 P 62,000 v. Answer: A 30% x 160,000 120,000 P 20,000 P200,000 120,000 units 48,000 units 168,000 units 36,000 units 132,000 units vii. Answer: C P450,000 240,000 P690,000 225,000 P465,000 P450,000 x 0.5 Total payments for purchases in June Deduct payments applicable to purchase of: June (P100,000 x 0.6) vi. Answer: C P520,000 140,000 660,000 130,000 P530,000 P750,000 x 0.6 P800,000 x 0.6 x 0.5 60,000 Sales for three-month period: July August 400,000 x 1.05 September 420,000 x 1.05 Total 400,000 420,000 441,000 1,261,000 Inventory, September 30 Total Requirements Less July Inventory Budgeted Production 370,440 1,631,440 300,000 1,331,440 viii. (441,000 x 1.05 x 0.8) Answer: C Beginning Inventory Required Purchases Direct Materials Used for Production Desired Ending Inventory (8000 x 3.5) 28,000 8,000 (24,000) 12,000 (8000 x 3) ix. Answer: C P140,000 Budgeted production Required materials per unit of product P60,000 445 LL 622,000 0.50 MM 622,000 1.00 NN 622,000 1.2 Budgeting Materials required Unit cost Peso amounts of materials used by units produced 311,000 P0.60 622,000 P1.70 746,400 P1.00 P186,600 P1,057,400 P746,400 Budgeted sales in units Add Finished goods, end Total Deduct Finished goods, beginning Budgeted production x. Answer: D Required pounds by production Ending raw materials required Beginning raw materials Budgeted purchases Raw materials required by June production: Add: Ending materials inventory Total materials required Deduct Beginning material inventory Budgeted materials purchase 640,000 90,000 730,000 108,000 622,000 xii. Answer: D Budgeted sales Add Finished goods inventory, end Total Deduct Finished good inventory, beginning Budgeted production Raw materials required by production (14,400 x 6 0.9) Desired Raw materials inventory end Total Deduct Raw materials inventory, beginning Budgeted purchase of raw materials 2,400 x 1.5 xiv.Answer: A 180,000 60,000 ( 30,000) 210,000 300,000 10,000 290,000 Material Q required by production 290,000 x 3 Less decrease in Material Q inventory 60,000 – 80,000 Budgeted purchase in pounds, Material Q 870,000 20,000 850,000 Materials required by production Increased in materials inventory Purchases 2,600 1,600 4,200 1,300 2,900 xvi.Answer: B 500,000 x 2 (50,000 – 40,000) Materials required by 2nd Quarter’s production Add: Materials inventory, end: Total materials required Less: Materials inventory, beginning: Total budget purchases in kilograms 18,000 11,400 29,400 15,000 14,400 xvii. 6,000 24,400 120,400 21,000 99,400 45,000 x 2.5 kgs. 40,000 x 2.5 x0.25 112,500 x 0.25 Cash sales (March) 0.2 x P420,000 Collections of account sales: March sales: (P420,000 x 0.8 x 0.7) February sales: (P300,000 x 0.8 x 0.25) January sales: (P240,000 x 0.8 x .05) 446 1,000,000 10,000 1,010,000 112,500 25.000 137,500 28,125 109,375 Answer: D Under flexible budget, analysis should be based on actual level achieved. Indirect labor cost per unit (P360,000 200,000 units) P1.80 Flexible budget allowance: 14,500 units x P1.80 P26,100 xviii. Answer: C xiii. Answer: D 2,400 3,900 6,300 3,600 2,700 Budgeted sales Less decrease in Finished goods inventory Budgeted production xv. Answer: B xi. Answer: B Materials required by June production 1,300 x 2 Add Ending raw materials inventory 1,600 x 2 x 0.5 Total materials required Deduct Beginning materials inventory 1,300 x 2 x 0.5 Materials to be purchased 1,200 x 2 1,300 x 2 . 1.5 P 84,000 235,200 60,000 9,600 Budgeting Total cash from sales The balance of Accounts Receivable, based on the collection pattern for Liberal Sales Company, equals 40 percent of credit sales for that month: P1,500,000 x 0.8 x 0.4 = P480,000 P388,800 xix.Answer: B Total cash collections Deductions collections on September sales Collections applicable to July and August sales Credit sales in July: P9,000 2 0.15 (P80,000 x 0.6) P57,000 48,000 P 9,000 P30,000 xxv. xx. Answer: D Collections from: January sales (P860,000 x 0.8 x 0.75) December sales (January 1 Accounts) Collections of credit sales Cash sales (P860,000 x 0.2) Total cash received P516,000 299,000 815,000 172,000 P987,000 xxii. P8,000 x 0.7 P7,000 x 0.3 Answer: B October 90,000 x .95 November 100,000 x .85 December 85,000 x .70 Fourth quarter sales collected in fourth quarter xxiii. Answer: D Cash sales Collections from account sales: January December November Total cash receipts in January Answer: A The balance of Accounts Receivable as of January 31, its first month of operations, will increase by P400,000 because the first collection on account sales will be in February. However, a question of how much increase in Accounts Receivable in February will equal to the difference between the February credit sales and 70% of January sales. xxiv. xxvii. Answer: D P5,600 2,100 P7,700 Cost of goods sold Deduct desired decrease in inventories Budgeted purchases Add decrease in Accounts Payable Budgeted payments for purchases P 85,500 85,000 59,500 P230,000 xxviii. Answer: A November costs October costs Total disbursements P 70,000 (P340,000 x 0.60) (P50,000 x 30/40) P 240,000 1,350,000 96,000 76,000 P1,762,000 xxvi. xxi.Answer: A Collections sales of: June: May: Total collections from sales Answer: C Gross receivable collected month’s sales November 2,000,000 x .12 October 1,800,000 x .75 September 1,600,000 x .06 August 1,900,000 x .04 Total credit xxix. 204,000 37,500 20,000 P331,500 Answer: B 447 P1,680,000 70,000 P1,610,000 150,000 P1,760,000 (P1,952,000 – P288,000) x 0.75 (P1,568,000 – P288,000) x 0.25) Answer: C Beginning Cash Add:Cash collected on June's sales Cash collected on May's sales Total P303,200 Less:Cash paid on June's purchases Cash paid on May's purchases Ending cash balance P1,248,000 320,000 P1,568,000 (P300,000 x .8 x .98) ((P300,000/1.25) x .2) 235,200 48,000 (P240,000 x .6 x .99) (P200,000 x .4) 142,560 80,000 P 20,000 283,200 222,560 P80,640 Budgeting xxx. Less: Beginning inventory units Budgeted purchases in units, March Answer: C Budgeted sales Add: Ending inventory (130%) Total Less: Beginning inventory Budgeted purchases (units) Unit purchase price Budgeted peso purchases Budgeted inventories: December 31 January 31 February 28 March 31 xxxi. January 11,900 14,820 26,720 15,470 11,250 200 P2,250,000 130% x 11,900 130% x 11,400 130% x 12,000 130% x 12,200 Answer: D Payments for: February purchases 54% x P2,436,000 January purchases 46% x P2,250,000 Total payments for purchases Selling, general and administrative expenses: February: [(P3,420,000 x 0.15) – P20,000]0.54 January: [(P3,570,000 x 0.15) – P20,000]0.46 Total cash disbursements February 11,400 15,600 27,000 14,820 12,180 200 P2,436,000 xxxiv. Answer: A Payments for purchases in the month of: December (0.2 x P120,000 x 0.6) January (0.2 x P160,000 x 0.4) Total January disbursements for purchases xxxiii. Answer: B Budgeted March sales Add: Ending inventory units Total units required P14,400 12,800 P27,200 xxxv. Answer: C Payments for purchases: May purchase (0.2 x P200,000 x 0.6) June purchase (0.2 x P220,000 x 0.4) Total Labor costs Fixed Overhead Interest payments Commission (0.03 x P1,020,000) Total disbursements 15,470 14,820 15,600 15,860 P1,315,440 1,035,000 P2,350,440 P24,000 17,600 41,600 60,000 30,000 45,000 30,600 P207,200 xxxvi. Answer: C June cash sales (P390,000 x 0.1) Collections from account sales: April sales (P390,000 x 0.9 x 0.7) May sales (P420,000 x 0.9 x 0.3) Total cash receipts, June 266,220 237,130 P2,853,790 P 39,000 245,700 113,400 P398,100 xxxvii. Answer: B xxxii. Answer: A Billings of December 31: Collections with 3% discount Collections end of January Billings of November 30: Total collections 15,600 12,260 P3,630,000 x 0.6 x 0.97 P3,630,000 x 0.25 P3,540,000 x 0.09 Marketable securities purchased on: June July Cumulative purchase of MS P2,112,660 907,500 318,600 P3,338,760 P 5,600 126,900 P132,500 xxxviii. Answer: A Cash Budget (P’000) 12,000 15,860 27,860 Cash receipts Cash disbursements 448 June P398.1 367.5 July P404.9 278.0 Aug P382.2 296.5 Sept P374.9 702.5 Budgeting Net cash inflow (outflow) Beginning cash balance Cumulative cash balance M/S sold (purchased) Cash loan Cash balance, end Budgeted production 30.6 25.0 55.6 - 5.6 0.0 P 50.0 126.9 50.0 176.9 - 126.9 0.0 P 50.0 85.7 50.0 135.7 - 85.7 0.0 P 50.0 ( 327.6) 50.0 ( 277.6) 218.2 109.4 P 50.0 xl. Answer: B June P351.0 P 39.0 July P315.0 P 35.0 Aug P378.0 P 42.0 Sept P369.0 P 41.0 xli. Answer: B 245.7 113.4 P398.1 105.3 264.6 P404.9 94.5 245.7 P382.2 113.4 220.5 P374.9 June P210.0 P 99.0 110.0 209.0 58.5 10.0 35.0 25.0 30.0 July P240.0 P 94.5 121.0 215.5 52.5 10.0 Aug P320.0 P108.0 115.5 223.5 63.0 10.0 Sept P230.0 P144.0 132.0 276.0 61.5 10.0 35.0 P367.5 P278.0 Budgeted Collections on Accounts Receivable January November sales 87,500 December sales 116,250 January sales February sales Total 203,750 Cash Payments (P’000) Purchases First month (45%) Second month (55%) Total purchases paid Labor General overhead Interest Cash dividend Taxes Purchase of equipt. Total payments P296.5 Sales Inventory, end Total Inventory, beg. February 116,250 131,750 248,000 March 131,750 93,000 224,750 5,900,000 P 93,600 84,000 120,000 P297,600 Total 87,500 232,500 263,500 93,000 676,500 Answer: C A month’s sales is collected 50 percent each in the first and second month. Therefore, the accounts receivable outstanding as of March 31 includes March’s sales as well as 50 percent of February sales. February’s accounts (P186,000 x 0.5) P 93,000 March’s sales 217,000 Outstanding accounts receivable, March 31 P310,000 xliii. 30.0 290.0 P702.5 Budgeted Production February 1,200,000 3,400,000 4,600,000 (2,600,000 2,500,000 xlii. xxxix. Answer: A January 1,700,000 2,600,000 4,300,000 (2,900,000 2,000,000 Payments for Purchases: January (December purchases - 1,800,000 x 0.052) February (January purchases – 1,400,000 x 0.06) March (February purchases – 2,000,000 x 0.06) Total for the quarter Cash Receipts (P’000) Account sales (90%) Cash sales Collection of accounts First month (30%) Second month (70%) Total 1,400,000 March Total 1,400,000 4,300,000 4,500,000 4,500,000 5,900,000 8,800,000 (3,400,000 (2,900,000 Answer: A Current unit cost per 1,000 Material Labor Overhead Total P 52 20 10 P 82 Effective January 1, 2007, the price of materials will be raised to P60. The unit cost for 2007 production will be P90. Since the sales of January and February come from December production, only the March sales will have cost of P90 per thousand. January and February cost of goods sold 449 (1,700 + 1,200) x P82 P237,800 Budgeting March Cost of goods sold (first quarter) xliv. 1,400 x P90 126,000 P363,800 January 203,750 February 248,000 March 224,750 93,600 28,000 14,000 52,700 84,000 40,000 20,000 37,200 . 188,300 15,450 30,000 45,450 20,450 20,450 0 25,000 . 181,200 66,800 25,000 91,800 66,800 87,250 0 112,250 120,000 50,000 25,000 43,400 8,000 64,560 48,420 359,380 (134,630) 25,000 (109,630) ( 87,250) Billed 8/20 P350,000 x 18% Billed 9/10 P350,000 x 80% x 98% Collections in Sept of Aug sales Answer: A Cash collections Cash disbursements Payments for materials Labor expenses Overhead Selling & administrative Interest Taxes Dividends Total disbursements Net Cash Inflow (Outflow) Cash Balance, Beginning Cumulative cash balance Marketable securities Cumulative MS Borrowings Cash Balance, End P 63,000 274,400 P337,400 xlvii. Answer: B Russon provides 25 percent of next month’s quantity sales. 25% x P400,000 x 80% = P80,000 xlviii. Answer: D May sales billed June 10 250,000x18% June Sales: Billed June 20 300,000 x 18% Billed July 10 300,000 x .80 z .98 July sales Billed July 20 P350,000 x .80 x .98 July Collections P 45,000 54,000 235,200 P274,400 P608,600 47,380 25,000 xlv.Answer: C Proforma Income Statement Sales Cost of goods sold Gross profit Selling expenses, 20% Operating income Interest expense Income before tax Income tax, 40% Net income xlvi. January 263,500 139,400 124,100 52,700 71,400 2,667 68,733 27,493 41,240 February 186,000 98,400 87,600 37,200 50,400 2,667 47,733 19,093 28,640 March 217,000 126,000 91,000 43,400 47,600 2,666 44,934 17,974 26,960 Total 666,500 363,800 302,700 133,300 169,400 8,000 161,400 64,560 96,840 CHAPTER 6: OPERATIONAL AND FINANCIAL BUDGETING Multiple Choice a Answer: A August sales 450 1. The starting point in preparing a comprehensive budget is a. the sales forecast. b. the cash budget. c. the budgeted income statement. Budgeting a. b. c. d. d. the flexible expense budget. d 2. Budgets are related to which of the following management functions? a. Planning. b. Control. c. Performance evaluation. d. All of the above. d 3. Which of the following should be used to forecast sales? a. Regression analysis. b. The scatter diagram. c. The judgment of the most experienced managers. d. Whatever method produces the most accurate forecast. a 4. A critical factor for using indicator methods to forecast sales is a. the availability of a forecasted value for the indicator. b. an upward trend in the value of the indicator. c. governmental collection of data for computing and reporting the value of the indicator. d. the availability of an indicator that covers the entire country. Costs Costs Costs Costs of of of of the the the the production department. general accounting department. product shipping department. material receiving department. d 8. Budgets set at very high levels of performance (i.e., very low costs) a. assist in planning the operations of the company. b. stimulate people to perform better than they ordinarily would. c. are helpful in evaluating the performance of managers. d. can lead to low levels of performance. c 9. Inventory policy is most critical in the budgeting of a. sales. b. cost of goods sold. c. purchases. d. expenses. a 10. Budgeting expenditures by purpose is called a. program budgeting. b. zero-based budgeting. c. line budgeting. d. flexible budgeting. d 5. Which of the following equations can be used to budget purchases? (BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold) a. Budgeted purchases = CGS + BI - EI b. Budgeted purchases = CGS + BI c. Budgeted purchases = CGS + EI + BI d. Budgeted purchases = CGS + EI – BI b 6. A flexible budget is a. one that can be changed whenever a manager so desires. b. adjusted to reflect expected costs at the actual level of activity. c. one that uses the formula total cost = cost per unit x units produced. d. the same as a continuous budget. c 11. Which of the following is a difference between a static budget and a flexible budget? a. A flexible budget includes only variable costs, a static budget includes only fixed costs. b. A flexible budget includes all costs, a static budget includes only fixed costs. c. A flexible budget gives different allowances for different levels of activity; a static budget does not. d. None of the above. b 7. The use of flexible (as opposed to static) budget allowances is LEAST important for which of the following? a 12. A static budget is most appropriate for a department 451 Budgeting a. b. c. d. with with with with a. b. c. d. only fixed costs. only variable costs. mostly mixed costs. any of the above characteristics. a 18. If cash receipts from customers are greater than sales, which of the following is most likely to be true? a. The balance of accounts receivable will decrease. b. The company's outstanding debt will decrease. c. The company's cash balance will increase. d. The company will show a profit. d 13. Which of the following is NOT an advantage of budgeting? a. It requires managers to state their objectives. b. It facilitates control by permitting comparisons of budgeted and actual results. c. It facilitates performance evaluation by permitting comparisons of budgeted and actual results. d. It provides a check-up device that allows managers to keep close tabs on their subordinates. b 14. An a. b. c. d. use static budget allowances for manufacturing costs. prepare production budgets without a sales forecast. budget unit production equal to budgeted unit sales. experience budget variances. c 19. A cash budget is NOT prepared until a company has a. obtained a commitment from its bank that cash will be available as needed. b. prepared the pro forma balance sheet. c. prepared its purchases budget. d. determined that enough cash is available to meet dividend payments. imposed budget is the same as a static budget. can lead to poor performance. is best for planning purposes. eliminates the need for a sales forecast. a 20. Which of the following is LEAST likely to be affected if unit sales for this month are lower than budgeted? a. Production for this month. b. Production for next month. c. Cash receipts for next month. d. Inventory at the end of this month. b 15. Prohibiting managers from overspending budget allowances a. improves company performance. b. can harm company performance. c. eliminates the need for comparisons of budgeted and actual amounts. d. usually reduces the need to prepare a cash budget. b 21. "Incremental budgeting" refers to a. line-by-line approval of expenditures. b. setting budget allowances based on prior year expenditures. c. requiring top management approval of increases in budgets. d. using incremental revenues and costs in budgeting. b 16. Which of the following will occur if X Co.'s actual sales in May are lower than its budgeted sales for that month? a. X won't have enough cash to cover bills requiring payment in May. b. X's actual inventory at the end of May will be higher than budgeted. c. X's actual purchases in June will be higher than budgeted. d. All of the above. b 22. The principal DISADVANTAGE of line budgeting is a. it can only be used by not-for-profit entities. b. it limits the flexibility of managers to accomplish the entity's objectives. c. it works only in conjunction with zero-based budgeting. c 17. JIT manufacturers are more likely than conventional manufacturers to 452 Budgeting d. experience cash shortages. d. none of the above. c 29. Quorum Company desires an ending inventory of $120,000. It expects sales of $240,000 and has a beginning inventory of $80,000. Cost of sales is 60% of sales. Budgeted purchases are a. $120,000. b. $144,000. c. $184,000. d. $264,000. a 23. The cash receipts budget a. requires a sales forecast. b. requires a purchases or production budget. c. is prepared after the cash disbursements budget. d. has none of the above characteristics. c 24. The type of company most likely to run short of cash during the year is one with a. little seasonality. b. high contribution margin percentage. c. high seasonality and rapid sales growth. d. relatively low fixed costs. d 25. If a. b. c. d. d 30. Garamond Company budgeted purchases of $200,000. Cost of sales was $240,000 and the desired ending inventory was $84,000. The beginning inventory was a. $40,000. b. $64,000. c. $84,000. d. $124,000. a company is earning a profit, its cash balance is increasing. its monthly cash disbursements will be stable. its inventory is increasing. it might have to borrow money. a 31. Wildwood Company budgeted purchases of 20,000 units. The budgeted beginning inventory was 4,800 units and the budgeted ending inventory was 6,000 units. Budgeted sales were a. 18,800 units. b. 21,200 units. c. 24,800 units. d. 26,000 units. a 26. One difference between budgeting in for-profit and not-forprofit entities is that not-for-profit entities usually a. budget expenses before revenues. b. don't need a cash budget. c. are less likely to use incremental budgeting. d. use computer software-packages to facilitate the budgeting process. d 27. To prepare its cash disbursements budget, a company uses information from a. its balance sheet at the end of the prior period. b. its purchases budget. c. its capital budget. d. all of the above sources. c 32. Menomonie Company budgeted sales of 18,000 units. The budgeted beginning inventory was 3,000 units and the budgeted ending inventory was 5,000 units. Budgeted production is a. 23,000 units. b. 21,000 units. c. 20,000 units. d. 16,000 units. b 28. Just-in-time manufacturers are more likely than conventional manufacturers to a. prepare production budgets without a sales forecast. b. budget materials purchases equal to the current month's needs for production. c. budget unit production for the month at greater than budgeted unit sales for the month. d 33. Baker Company budgets supplies as $20,000 + ($1.20 x direct labor hours). Baker has budgeted 18,000 direct labor hours, $130,000 direct labor cost. The flexible budget allowance for supplies is a. $18,000. b. $20,000. 453 Budgeting b. 52,000 units. c. 55,000 units. d. 74,000 units. c. $150,000. d. some other number. b 34. Equinox Company budgeted sales of 44,000 units for January, 60,000 for February. The budgeted beginning inventory for January 1 was 14,000 units. Equinox desires an ending inventory equal to one-half of the following month's sales needs. Budgeted production for January is a. 74,000 units. b. 60,000 units. c. 52,000 units. d. 28,000 units. c 38. Chetek Company budgeted purchases of 19,000 units. The budgeted beginning inventory was 12,400 units and the budgeted ending inventory was 13,000 units. Budgeted sales were a. 32,000 units. b. 31,400 units. c. 18,400 units. d. 19,600 units. d 39. Barron Company manufactures a single product. Barron keeps inventory of raw materials at 50% of the coming month's budgeted production needs. Each unit of product requires three pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in July would be a. 1,450 pounds. b. 2,400 pounds. c. 3,900 pounds. d. some other number. c 35. Sams Company manufactures a single product. It keeps its inventory of finished goods at 75% the coming month's budgeted sales, inventory of raw materials at 50% of the coming month's budgeted production needs. Each unit of product requires two pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in June would be a. 1,525 pounds. b. 2,550 pounds. c. 2,800 pounds. d. 3,050 pounds. a 36. Hayward Company desires an ending inventory of $70,000. It expects sales of $400,000 and has a beginning inventory of $65,000. Cost of sales is 65% of sales. Budgeted purchases are a. $265,000. b. $395,000. c. $405,000. d. $535,000. c 40. Acker Company has prepared the following flexible budget for production costs: total production costs = $260,000 + $5X, where X is the number of machine hours. Acker produced 20,000 units, using 34,000 machine hours at a total cost of $425,000. The flexible budget allowance for production costs is a. $260,000. b. $425,000. c. $430,000. d. $525,000. c 37. Bryce Company budgeted sales of 50,000 units for January, 60,000 for February. Bryce Company desires an ending inventory equal to one-half of the following month's sales needs. Inventory on January 1 was as desired. Budgeted production for January is a. 22,000 units. c 41. Scooter Inc. has projected sales to be $130,000 in June, $135,000 in July and $150,000 in August. Scooter collects 30% of a month's sales in the month of sale, 50% in the month following the sale, and 16% in the second month following the sale. Cash collections in August would be a. $ 45,000. 454 Budgeting c. $144,000. d. $186,000. b. $127,300. c. $133,300. d. $138,500. d 42. Rundall Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be $160,000; May purchases will be $240,000. Cash payments in May will be a. $ 72,000. b. $108,000. c. $168,000. d. $184,000. c 46. Andover Inc. has projected sales to be: February, $10,000; March, $9,000; April, $8,000; May, $10,000; and June, $11,000. Andover has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 55% collected the second month. Total cash receipts in May would be a. $3,000. b. $8,150. c. $8,705. d. some other number. c 43. Randall Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be $80,000; May purchases will be $120,000. The accounts payable balance on May 31 will be a. $36,000. b. $54,000. c. $84,000. d. $92,000. d 47. Conde Inc. has projected sales to be: February, $20,000; March, $18,000; April, $16,000; May, $20,000; and June, $22,000. Conde has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 60% collected the second month. Accounts receivable for May 31 would be a. $ 6,160. b. $13,300. c. $14,000. d. $20,720. d 48. Holmgren estimates its supplies purchases to be $21,000 in August and $28,000 in September. Holmgren pays 70% of its accounts in the month of purchase with the remainder paid the following month. September payments would be a. $14,700. b. $19,600. c. $23,100. d. $55,900. c 44. Alfuth Co. makes payments for purchases 10% during the month of purchase, 60% in the following month, and the remainder in the second month following the purchase. Purchases are projected to be $260,000 in January, $280,000 in February, and $320,000 in March. March payments will be a. $ 32,000. b. $168,000. c. $278,000. d. some other number. c 49. Danner Inc. has projected sales to be $100,000 in June, $90,000 in July, and $70,000 in August. Danner collects 50% of a month's sales in the month of sale, 30% in the month following the sale, and 16% in the second month following the sale. Cash collections in August would be a. $35,000. b. $62,000. c. $78,000. d. $86,000. d 45. Reid Co. makes payments for purchases 10% during the month of purchase, 60% in the following month, and the remainder in the second month following the purchase. Purchases are projected to be $130,000 in January, $140,000 in February, and $160,000 in March. The March 31 accounts payable balance will be a. $48,000. b. $96,000. 455 Budgeting a 50. Clearwater Inc. has projected sales to be $160,000 in April, $200,000 in May, and $240,000 in June. Clearwater collects 40% of a month's sales in the month of sale, 40% in the month following the sale, and 20% in the second month following the sale. The accounts receivable balance on June 30 would be a. $184,000. b. $144,000. c. $ 40,000. d. some other number. T 10. Line-by-line budget authorization is common in governmental units. Problems 1. Ballan Inc. estimates its units sales for the coming months to be as follows: March April May June July August True-False F 1. A just-in-time manufacturer does NOT need a sales budget. T 2. A flexible budget allowance is NOT especially useful for budgeting discretionary costs. F 4. The longer the time period covered by a budget, the more useful the budget will be for controlling operations. F 5. A purchases budget is normally prepared after the company has forecast how much cash it will have available to pay for purchases. F 6. Imposed budgets are exceptionally ambitious goals not likely to be achieved without making fundamental changes in the way a job is done. F 7. A JIT manufacturer that maintains no inventory doesn't need a cash disbursements budget. F F Ballan maintains inventory at budgeted sales needs for the next month. March 1 inventory will be 248,000 units. 3. The purchases budget is prepared before the sales budget because the company cannot estimate what it will sell until it has some idea of what will be on hand. F 280,000 260,000 250,000 230,000 240,000 225,000 a. Prepare a monthly purchasing schedule for March through July. SOLUTION: 8. The budget for a retailer is likely to be more complex than that for a manufacturer because a retailer has a wider variety of customers. 9. The increasing public demand for accountability from governmental and other not-for-profit organizations has resulted in an increased use of incremental budgeting. a. March purchases: 248,000] 292,000 units [280,000 + 260,000 – April purchases: 260,000] 250,000 units [260,000 + 250,000 – May purchases: 250,000] 230,000 units [250,000 + 230,000 – June purchases: 230,000] 240,000 units [230,000 + 240,000 – July purchases: 240,000] 225,000 units [240,000 + 225,000 – 2. Superior Company manufactures a single product. 456 It keeps its Budgeting ======== inventory of finished goods at twice the coming month's budgeted sales and inventory of raw materials at 150% of the coming month's budgeted production. Each unit of product requires five pounds of materials, which cost $3 per pound. The sales budget is, in units: May, 10,000; June, 12,400; July, 12,600; August, 13,200. 3. Ironwood sells a single product for $10. The purchase cost is $4 per unit and Ironwood pays a 20% sales commission. Fixed costs are $45,000 per month including $12,000 depreciation, and the company maintains inventory equal to budgeted sales needs for the following month. The following budgeted data are available. a. Compute budgeted production for June. b. Compute budgeted production for July. Inventory on hand, February 1 Budgeted sales - February - March - April c. Compute budgeted material purchases for June in pounds and dollars. 28,000 24,000 26,000 25,000 units units units units a. Compute total budgeted income for February and March. b. Find budgeted inventory at March 31 in units and dollars. c. Find budgeted purchases for March in units and dollars. SOLUTION: SOLUTION: a. June production: 12,800 units 12,400)] [12,400 + (2 x 12,600) - (2 x b. July production: 13,800 units 12,600)] [12,600 + (2 x 13,200) - (2 x c. June materials purchases: Total Less beginning inventory (5 lbs. x 12,800 x 150%) Equals dollar purchases $110,000 Sales [(24,000 + 26,000) x $10] Cost of sales (50,000 x $4) $500,000 200,000 ------$300,000 100,000 ------$200,000 90,000 ------$110,000 ======== Gross profit Commissions at 20% 71,500 pounds; $214,500 Used in production (5 lbs. x 12,800) lbs. Ending inventory (5 lbs. x 13,800 x 150%) Purchases Times cost per pound a. Budgeted income: Contribution margin Fixed costs (2 x 45,000) 64,000 Income 103,500 ------167,500 96,000 ------71,500 $3 ------$214,500 b. Budgeted inventory: 25,000 units; $100,000 c. Budgeted purchases: 25,000 units; $100,000 457 ($4 x 25,000) Budgeting Cost of sales Ending inventory 26,000 units 25,000 -----51,000 26,000 -----25,000 units x $4 ====== Total required Less beginning inventory Purchases inventory at 75% of budgeted sales needs for the next month. Acme began June with $150,000 in inventory. $104,000 100,000 -------$204,000 104,000 -------$100,000 ======== a. Prepare a monthly purchasing schedule (in $) for as many months as is possible. SOLUTION: a. 4. Westrum estimates production overhead costs equal to $300,000 + $2X, where X is the number of machine hours used. Westrum budgeted 40,000 machine hours for 20X4. Westrum produced 23,000 units in 20X4, each requiring 3 machine hours. Actual production costs were $420,000. October Sales $240,000 x 40% x .40 a. Calculate the flexible budget allowance for production overhead costs for 20X4. -------Cost of Sales $ 96,000 + Ending Inv 60,000 - Beg Inv (72,000) b. Find the amount and direction of the budget variance for 20X4 for production overhead. (favorable unfavorable) Circle one answer. -------Purchases $ 84,000 SOLUTION: a. Flexible budget allowance, x $2)] b. Budget variance: $438,000 $18,000 favorable [$300,000 + (23,000 x 3 June July August September $340,000 $360,000 $300,000 $260,000 x .40 x .40 x .40 x .40 -------- -------- -------- -------- $136,000 $144,000 $120,000 $104,000 108,000 90,000 78,000 72,000 (150,000) (108,000) (90,000) (78,000) -------- -------- -------- -------- $ 94,000 $126,000 $108,000 $ 98,000 ======== ======== ======== ======== ======== ($438,000 - $420,000) 6. Bay City estimates production overhead costs equal to $200,000 + $4X + $7Y, where X is the number of direct labor hours used and Y is the number of machine hours used. Bay City budgeted 20,000 direct labor hours and 50,000 machine hours for 20X2. Bay City produced 30,000 units in 20X2, each requiring 1 direct labor hour and 2.5 machine hours. Actual production costs were $890,000. 5. Acme Inc. estimates its dollar sales for the coming months to be as follows. June $340,000 July 360,000 August 300,000 September 260,000 October 240,000 November 200,000 a. Calculate the flexible budget allowance for production overhead costs for 20X2. b. Find the amount and direction of the budget variance for Acme has an average gross margin of 40% of sales and maintains 458 Budgeting 20X2 for production overhead. Circle one answer. (favorable suppliers and fixed costs. Compute the budgeted cash balance at the end of March. unfavorable) SOLUTION: SOLUTION: a. Flexible budget allowance, $845,000 x $4) + (30,000 x 2.5 x 7)] b. Budget variance: $45,000 unfavorable a. March receipts: 40%)] [$200,000 + (30,000 x 1 [($240,000 x 60%) + ($300,000 x b. Receivables at end of March: 40%)] ($845,000 - $890,000) $180,000 c. Inventory at end of February: 7. Webster Company has the following sales budget. January February March April $264,000 d. February purchases: x 2 x 70%) $200,000 $240,000 $300,000 $360,000 e. March payments: 80%)] Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the following month. Webster keeps inventory equal to double the coming month's budgeted sales requirements. It pays for purchases 80% in the month of purchase and 20% in the month after purchase. Inventory at the beginning of January is $190,000. Webster has monthly fixed costs of $30,000 including $6,000 depreciation. Fixed costs requiring cash are paid as incurred. $420,000 $252,000 $282,400 f. AP at end of February: g. Cash at end of March: - $24,000) [$300,000 x (100% ($300,000 x 70% x 2) [($240,000 x 70%) + ($300,000 - ($240,000 x 2 x 70%)] [(252,000 x 20%) + ($290,000 x $50,400 $2,600 ($252,000 x 20%) ($25,000 + $264,000 - $282,400 8. Weasel Company has the following sales projections for 20X3: a. Compute budgeted cash receipts in March. January February March April May June b. Compute budgeted accounts receivable at the end of March. c. Compute budgeted inventory at the end of February. d. Compute budgeted purchases in February. $200,000 210,000 225,000 230,000 245,000 240,000 Weasel collects 40% of its sales in the month of sale, 45% in the month following the sale and 13% in the second month following the sale. Records show that sales were $225,000 in November and $208,000 in December 20X2. e. March purchases are $290,000. Compute budgeted cash payments in March to suppliers of goods. f. Compute budgeted accounts payable for goods at the end of February. a. Prepare a schedule of cash receipts for the first three months of 20X3. g. Cash at the end of February is $45,000. Cash disbursements are not required for anything other than payments to 459 Budgeting requirements. It pays for purchases 40% in the month of purchase and 60% in the month after purchase. Accounts Payable is $94,800 on March 1. b. What would be the accounts receivable (net of bad debts) balance on March 31, 20X3? SOLUTION: a. January collections: (13% x 225,000) (45% x 208,000) (40% x 200,000) b. = = = February collections: (13% x 208,000) = (45% x 200,000) = (40% x 210,000) = $27,040 90,000 84,000 ------$201,040 ======== March collections: $26,000 94,500 90,000 ------$210,500 ======== $157,800 (13% x 200,000) = (45% x 210,000) = (40% x 225,000) = a. Prepare a monthly purchasing schedule for March through May. $29,250 93,600 80,000 ------$202,850 ======== b. Prepare a monthly cash payment schedule for March through May. c. Compute the accounts payable balance as of May 31. SOLUTION: a. $ 27,300 = February sales 210,000 x 13% $130,500 = March sales 225,000 x (45% + 13%) -------$157,800 ======== Cost of Sales + Ending Inv - Beg Inv Purchases 9. Bismarck has the following sales budget: March April May June March $300,000 x .55 -------$165,000 42,900 (41,250) -------$166,650 ======== Sales x 55% $300,000 $312,000 $320,000 $348,000 b. March payments: Cost of sales is 55% of sales. Bismarck keeps an inventory equal to one-fourth the coming month's budgeted sales 460 April $312,000 x .55 -------$171,600 44,000 (42,900) -------$172,700 ======== (40% x 166,650) = Mar 1 Acct Pay = May $320,000 x .55 -------$176,000 51,975 (44,000) -------$183,975 ======== $ 66,660 94,800 ------$161,460 ======== Budgeting April payments: May payments: (40% x 172,700) = (60% x 166,650) = $ 69,080 99,990 ------$169,070 ======== (40% x 183,975) = (60% x 172,700) = $ 73,590 103,620 ------$177,210 ======== c. Accounts Payable, May 31: $110,385 SOLUTION: a. January collections: (24% x 160,000) = (45% x 168,000) = (30% x 160,000) = $38,400 75,600 48,000 ------$162,000 ======== February collections: (24% x 168,000) = $40,320 (45% x 160,000) = 72,000 (30% x 168,000) = 50,400 ------$162,720 ======== [60% x $183,975] 10. Hicks Company has the following sales projections for 20X4: March collections: January $160,000 February 168,000 March April 175,000 180,000 May June 195,000 190,000 Hicks collects 30% of its sales in the month of sale, 45% in the month following the sale, and 24% in the second month following the sale. Records show that sales were $160,000 in November and $168,000 in December 20X3. b. $161,070 (24% x 160,000) = $38,400 (45% x 168,000) = 75,600 (30% x 175,000) = 52,500 ------$166,500 ======== $40,320 = February sales (168,000 x 24%) 120,750 = March sales [175,000 x (45% + 24%)] a. Prepare a schedule of cash receipts for the first three months of 20X4. ------$161,070 b. What would be the accounts receivable balance (net of bad debts) on March 31, 20X4? 461