Budgeting

MODULE 8 - BUDGETING THEORIES: Basic Concepts 1. The concept of management by exception refers managements 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.

to

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. 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 companys 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. 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. 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 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 managements support is necessary to promote budget participation. D. The top management should review and approve each
177

8. A formal written statement of managements plans for the future, packaged in financial terms, is a: A. Responsibility report. C. Cost of production report. B. Performance report. D. Budget. 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 following activities except: A. Requiring all organizational units to establish their goals for coming period. B. Increasing the motivation of managers and employees providing agreed-upon expectations. C. Improving overall decision making by considering viewpoints, options, and cost control programs. D. Directing and coordinating operations during the period. the the by all

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. 24.Which of the following is NOT an advantage of budgeting?

Budgeting

responsibility units budget. 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. 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. C. Top management involvement in support of the budget. D. The opportunity budgeting gives to risk-taker managers for department growth. 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. 35.The method of budgeting which adds one months budget to the end of the plan when the current months budget is dropped from the plan refers to A. Long-term budget C. Incremental budget B. Operations budget D. Continuous budget 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.
178

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. 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 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 C. program budgeting B. zero-based 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 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. 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 51.Zero-base budgeting requires managers to A. Justify expenditures that are increases over the prior periods

Budgeting

budgeted amount. B. Justify all expenditures, not just increases over last years amount. C. Maintain a full-year budget intact at all times. D. Maintain a budget with zero increases over the prior period. 13.Zero-based budgeting: A. involves the review of changes made to an organizations 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. 18.A systematized approach known as zero-based budgeting: A. Classifies the budget by the prior years 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. 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. 34.Budgeting expenditures by purpose is called A. program budgeting C. zero-based budgeting B. line budgeting D. flexible budgeting

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. 45.Flexible budgeting is a reporting system wherein the A. Budget standards may be adjusted at managements 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. 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. 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 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
179

Budgeting

A. flexible budget. B. Program budget.

C. Discretionary budget. D. Manufacturing budget.

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. 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 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. 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. 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 25.The difference between an individual's submitted budget
180

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 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 39.The procedure for setting profit objectives in which the determination of profit objectives is 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 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 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

Budgeting

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. 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 14.Operating budgets are A. a forecast of expected operating expenses. 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 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.
181

C. Estimating from previous sales volume. D. All of these are useful. 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 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 53.An A. B. C. D. overly optimistic sales budget may result in increases in selling prices late in the year. insufficient inventories. increased sales during the year. excessive inventories.

56.Which of the following budgets provides the data for the preparation of the direct labor cost budget? A. Direct materials purchase budget. C. Sales budget. B. Cash budget. D. Production budget. 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.

Budgeting

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 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. 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 years actual cost and activity data as this years 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. PROBLEMS: Cost estimation formula 1 . 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
182

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 Sales budget Purchases budget merchandising concern 2 . 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
3

. 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 months 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 . 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

. 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 6 . Montalban Companys sales budget shows the following expected sales for the following year:

Budgeting

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 quarters 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
7

. 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 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

. 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 months 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

Raw materials purchases budget 10 . 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
11

Ending inventory budget 8 . 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
183

. Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods at 75% the coming months budgeted sales. It also keeps its inventory of raw materials at 50% of the coming months 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

12

. 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

Budgeting

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
13

B. 890,000
15

D. 908,000

. Violet Company manufactures a single product. It keeps its inventory of finished goods at twice the coming months budgeted sales, inventory of raw materials at 150% of the coming months 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

. 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 . Diliman Corporation includes the following quarterly budget for production: Quarter Production First 60,000 units Second 45,000 units 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 quarters 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

16

14

. 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:
Finished goods 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
184

Actual, Jan. 1 60,000

Budgeted, Dec 31 50,000

Indirect labor costs 17 . 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

Budgeting

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 Cash receipts budget Sales 18 . 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 Credit sales 19 . 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 Cash collections 20 . Obligacion Company has P299,000 in accounts receivable on January 1, 2006. Budgeted 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
185

21

. 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 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 B. P230,000 D. P251,400

22

Budgeting
23

. 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 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

25

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 Accounts receivable balance 24 . 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 months 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
186

. Ironman Company is preparing its cash budget for the month ending November 30. The following information pertains to Ironmans past collection experience from its credit sales: Current months sales 12% Prior months sales 75% 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

Increase in accounts receivable 26 . 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 Cash disbursements

Budgeting
27

. 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 B. P1,600,000 D. P1,760,000 . 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

A. P64,160 B. P73,000

C. P80,640 D. P85,440

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 The following information are relevant to 2007 operations: Sales: a. Each months 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 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. 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 months units of ending inventory is equal to one hundred thirty percent of the next months 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 months sales. Actual and projected sales are as follows: UNITS
187

28

Ending cash balance 29 . 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:

PESOS

Budgeting

November December January February March April

11,800 12,100 11,900 11,400 12,000 12,200

P3,540,000 3,630,000 3,570,000 3,420,000 3,600,000 3,660,000

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. 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. The Atlanta Corporation has forecast the following sales for the first seven months of the year: January February March April P120,000 160,000 180,000 240,000 May June July P120,000 200,000 220,000

. 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 . 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 . 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 . 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

31

32

33

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, Atlantas 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.
34

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: 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.
188

. 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

35

. 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

Question Nos. 36 through 38 are based on the following: Super Sales actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through

Budgeting

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 Purchases P200,000 220,000 210,000 240,000 320,000 230,000

38

. 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

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. 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. 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).
36

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: January February March April May P263,500 P186,000 P217,000 P310,000 P387,500 (1,700,000 (1,200,000 (1,400,000 (2,000,000 (2,500,000 fasteners) fasteners) fasteners) fasteners) fasteners)

Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December (1,500,000 fasteners). 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. 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.) 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
189

. 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 . 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

37

Budgeting

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. 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. As of year-end, the Ingo Corporation balance sheet was as follows: Ingo Corporation Balance Sheet December 31, 2006 ASSETS Current assets: Cash P Accounts receivable Inventory Total current assets Plant and equipment, net of accumulated depreciation Total Assets LIABILITIES AND STOCKHOLDERS EQUITY Accounts payable Long-term debt, 8% Common stock Retained earnings Total Liabilities and Stockholders Equity

39

. 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 . 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 . 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 . The amount of accounts receivable outstanding as of March 31, 2007 is: A. P217,000 C. P310,000 B. P224,750 D. P108,500 . 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 . The total cash and marketable securities as of January 31 will be: A. P45,450 C. P91,800 B. P25,000 D. P54,450 . 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

40

41

42

43

30,000 320,000 237,800 587,800 of P200,000 800,000 P1,387,800 P 93,600 400,000 504,200 390,000 P1,387,800
190

44

45

Question Nos. 46 through 48 are based on the Russon Corporation, a

Budgeting

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 months sales, and on the 20th of the month for the first half of the current months sales. The terms of all sales are 2/10, net 30. Based upon past experience, the collection of accounts receivable is as follows: Within the discount period On the 30th day Uncollectible 80% 18% 2%

B. P662,600

D. P608,600

Russons 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 months sales demand and to maintain a desired monthly ending inventory of 25% of the next months sales. All purchases are on credit with terms of net/30. Russon pays for 50% of a months purchases in the month of purchase and 50% in the month following the purchase.
46

. 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 . The budgeted peso value of Russons inventory on August 31 will be A. P110,000 C. P112,000 B. P 80,000 D. P100,000 . How much cash can Russon plan to collect from accounts receivable during July? A. P574,000 C. P619,000
191

47

48

. Answer: A The amount of fixed costs in operating branches fixed cost line intercepts the vertical axis). Total operating costs Less fixed costs Total variable costs (10 warehouses) Variable costs per branch: P2,500,000 10 . 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

10 warehouses is P400,000 (the P2,900,000 400,000 P2,500,000 P 250,000 P520,000 140,000 660,000 130,000 P530,000

Answer: A Cost of goods sold P750,000 x 0.6 P450,000 Add Ending Inventory P800,000 x 0.6 x 0.5 240,000 Total available for sale P690,000 Deduct Beginning inventory P450,000 x 0.5 Budgeted purchases, February P465,000 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

225,000

Answer: A Total payments for purchases in June P140,000 Deduct payments applicable to purchase of: June (P100,000 x 0.6) P60,000 May (P200,000 x 0.30) 60,000 120,000 Payments applicable to April purchase P 20,000 Credit purchase in April: P20,000 0.10 P200,000 Answer: C Budgeted sales, First Quarter Add Required Ending Finished goods: Total units required Less Beginning Finished goods Budgeted production in units Answer: C Sales for three-month period: July August 400,000 x 1.05 September 420,000 x 1.05 Total 120,000 units 30% x 160,000 168,000 units 36,000 units 132,000 units

48,000 units

400,000 420,000 441,000 1,261,000

Inventory, September 30 Total Requirements Less July Inventory Budgeted Production

(441,000 x 1.05 x 0.8) 1,631,440 300,000 1,331,440

370,440

. Answer: C Beginning Inventory (8000 x 3.5) Required Purchases Direct Materials Used for Production Desired Ending Inventory

28,000 8,000 (8000 x 3) 12,000

(24,000)

. Answer: C LLMMNNBudgeted production622,000622,000622,000Required materials per unit of product0.501.001.2Materials required311,000622,000746,400Unit cost P0.60 P1.70 P1.00Peso amounts of materials used by units produced P186,600 P1,057,400 P746,400 Budgeted sales in units 640,000 Add Finished goods, end 90,000 Total 730,000 Deduct Finished goods, beginning 108,000 Budgeted production 622,000
10

Answer: D Required pounds by production Ending raw materials required Beginning raw materials Budgeted purchases

180,000 60,000 ( 30,000) 210,000 2,600 1,600 4,200 1,300 2,900

11

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 Answer: D Budgeted sales Add Finished goods inventory, end Total Deduct Finished good inventory, beginning Budgeted production

12

18,000 11,400 29,400 15,000 14,400 6,000

Raw materials required by production (14,400 x 6 0.9) Desired Raw materials inventory end 24,400 Total 120,400 Deduct Raw materials inventory, beginning 21,000 Budgeted purchase of raw materials 99,400
13

Answer: D Raw materials required by June production:

1,200 x 2

2,400

Add: Ending materials inventory 1,300 x 2 . 1.5 3,900 Total materials required 6,300 Deduct Beginning material inventory 2,400 x 1.5 Budgeted materials purchase 2,700
14

3,600

Answer: A Budgeted sales Less decrease in Finished goods inventory Budgeted production Material Q required by production Less decrease in Material Q inventory Budgeted purchase in pounds, Material Q

300,000 10,000 290,000 290,000 x 3 60,000 80,000 850,000 870,000 20,000

15

Answer: B Materials required by production Increased in materials inventory Purchases

500,000 x 2 (50,000 40,000) 1,010,000

1,000,000 10,000

16

Answer: B Materials required by 2nd Quarters production45,000 x 2.5 kgs. 112,500 Add: Materials inventory, end: 40,000 x 2.5 x0.25 25.000 Total materials required 137,500 Less: Materials inventory, beginning: 112,500 x 0.25 28,125 Total budget purchases in kilograms 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 Answer: C Cash sales (March) 0.2 x P420,000 Collections of account sales: March sales: (P420,000 x 0.8 x 0.7) 235,200 February sales: (P300,000 x 0.8 x 0.25) January sales: (P240,000 x 0.8 x .05) 9,600 Total cash from sales P388,800

17

18

P 84,000 60,000

19

Answer: B Total cash collections P57,000 Deductions collections on September sales (P80,000 x 0.6) 48,000 Collections applicable to July and August sales P 9,000 Credit sales in July: P9,000 2 0.15 P30,000 Answer: D Collections from: January sales December sales Collections of Cash sales

20

(P860,000 x 0.8 x 0.75) (January 1 Accounts) credit sales (P860,000 x 0.2)

P516,000 299,000 815,000 172,000

Total cash received

P987,000

Answer: A Collections sales of: June: P8,000 x 0.7 May: P7,000 x 0.3 Total collections from sales Answer: B October 90,000 x .95 November 100,000 x .85 December 85,000 x .70 Fourth quarter sales collected in fourth quarter Answer: D Cash sales Collections from account sales: January (P340,000 x 0.60) December (P50,000 x 30/40) November Total cash receipts in January

P5,600 2,100 P7,700

22

P 85,500 85,000 59,500 P230,000

23

P 70,000 204,000 37,500 20,000 P331,500

24

. Answer: B 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 . Answer: C Gross receivable collected months 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

25

P 240,000 1,350,000 96,000 76,000 P1,762,000

26

. 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. . Answer: D Cost of goods sold Deduct desired decrease in inventories Budgeted purchases Add decrease in Accounts Payable Budgeted payments for purchases Answer: A November costs

27

P1,680,000 70,000 P1,610,000 150,000 P1,760,000

28

(P1,952,000 P288,000) x 0.75P1,248,000

October costs (P1,568,000 P288,000) x 0.25) 320,000 Total disbursements P1,568,000

Answer: C Beginning Cash P 20,000 Add:Cash collected on June's sales (P300,000 x .8 x .98) 235,200 Cash collected on May's sales ((P300,000/1.25) x .2) 48,000 283,200 Total P303,200 Less:Cash paid on June's purchases (P240,000 x .6 x .99) 142,560 Cash paid on May's purchases (P200,000 x .4) 80,000 222,560 Ending cash balance P80,640

30

. Answer: C JanuaryFebruaryBudgeted sales11,90011,400Add: Ending inventory (130%)14,82015,600Total26,72027,000Less: Beginning inventory15,47014,820Budgeted purchases (units)11,25012,180Unit purchase price 200 200 Budgeted peso purchasesP2,250,000P2,436,000 Budgeted inventories: December 31 130% x 11,900 15,470 January 31 130% x 11,400 14,820 February 28 130% x 12,000 15,600 March 31 130% x 12,200 15,860
31

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 Answer: A Billings of December 31: Collections with 3% discount Collections end of January Billings of November 30: Total collections Answer: B Budgeted March sales Add: Ending inventory units Total units required Less: Beginning inventory units Budgeted purchases in units, March 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

P1,315,440 1,035,000 P2,350,440 266,220 237,130 P2,853,790

32

P3,630,000 x 0.6 x 0.97 P3,630,000 x 0.25 P3,540,000 x 0.09 P3,338,760

P2,112,660 907,500 318,600

33

12,000 15,860 27,860 15,600 12,260

34

P14,400 12,800 P27,200

35

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 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 Answer: B Marketable securities purchased on: June July Cumulative purchase of MS

P24,000 17,600 41,600 60,000 30,000 45,000 30,600 P207,200

36

P 39,000 245,700 113,400 P398,100

37

P 5,600 126,900 P132,500

38

. Answer: A Cash Budget (P000) JuneJulyAugSeptCash receiptsP398.1P404.9P382.2P374.9Cash disbursements 367.5 278.0 296.5 702.5Net cash inflow (outflow) 30.6 126.9 85.7( 327.6)Beginning cash balance 25.0 50.0 50.0 50.0Cumulative cash balance 55.6 176.9 135.7( 277.6)M/S sold (purchased) 5.6- 126.9- 85.7 218.2Cash loan 0.0 0.0 0.0 109.4Cash balance, endP 50.0P 50.0P 50.0P 50.0 Cash Receipts (P000) JuneJulyAugSeptAccount sales (90%)P351.0P315.0P378.0P369.0Cash salesP 39.0P 35.0P 42.0P 41.0Collection of accounts First month (30%) 245.7 105.3 94.5 113.4 Second month (70%) 113.4 264.6 245.7 220.5TotalP398.1P404.9P382.2P374.9 Cash Payments (P000) JuneJulyAugSeptPurchasesP210.0P240.0P320.0P230.0First month (45%)P 99.0P 94.5P108.0P144.0Second month (55%) 110.0 121.0 115.5 132.0 Total purchases paid 209.0 215.5 223.5 276.0Labor 58.5 52.5 63.0 61.5General overhead 10.0 10.0 10.0 10.0Interest 35.0 35.0Cash dividend 25.0Taxes 30.0 30.0Purchase of equipt. 290.0Total paymentsP367.5P278.0P296.5P702.5 39 . Answer: A Budgeted Production JanuaryFebruaryMarchTotalSales1,700,0001,200,0001,400,0004,300,000Inventory, end2,600,0003,400,0004,500,0004,500,000Total4,300,0004,600,0005,900,0008,800, 000Inventory, beg.(2,900,000(2,600,000(3,400,000(2,900,000Budgeted production1,400,0002,000,0002,500,0005,900,000 40 . Answer: B Payments for Purchases: January (December purchases - 1,800,000 x 0.052) P 93,600 February (January purchases 1,400,000 x 0.06) 84,000

March (February purchases 2,000,000 x 0.06) 120,000 Total for the quarter P297,600
41

42

. Answer: B Budgeted Collections on Accounts Receivable JanuaryFebruaryMarchTotalNovember sales87,50087,500December sales116,250116,250232,500January sales131,750131,750263,500February sales 93,00093,000Total203,750248,000224,750676,500 . Answer: C A months sales is collected 50 percent each in the first and second month. Therefore, the accounts receivable outstanding as of March 31 includes Marchs sales as well as 50 percent of February sales. Februarys accounts (P186,000 x 0.5) P 93,000 Marchs sales 217,000 Outstanding accounts receivable, March 31 P310,000 . Answer: A Current unit cost per 1,000 Material Labor Overhead Total

43

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(1,700 + 1,200) x P82 March 1,400 x P90 126,000 Cost of goods sold (first quarter) P363,800
44

P237,800

45

46

Answer: A JanuaryFebruaryMarchCash collections203,750248,000224,750Cash disbursements Payments for materials93,60084,000120,000 Labor expenses28,00040,00050,000 Overhead14,00020,00025,000 Selling & administrative52,70037,20043,400 Interest8,000 Taxes64,560 Dividends . . 48,420 Total disbursements188,300181,200359,380 Net Cash Inflow (Outflow)15,45066,800(134,630)Cash Balance, Beginning30,00025,00025,000Cumulative cash balance45,450 91,800(109,630)Marketable securities20,45066,800( 87,250) Cumulative MS20,45087,250Borrowings 0 0 47,380Cash Balance, End25,000112,25025,000 . Answer: C Proforma Income Statement JanuaryFebruaryMarchTotalSales263,500186,000217,000666,500Cost of goods sold139,40098,400126,000363,800Gross profit124,10087,60091,000302,700Selling expenses, 20%52,70037,20043,400133,300Operating income71,40050,40047,600169,400Interest expense2,6672,6672,6668,000Income before tax68,73347,73344,934161,400Income tax, 40%27,49319,09317,97464,560Net income41,24028,64026,96096,840 . Answer: A August sales

Billed 8/20 P350,000 x 18% Billed 9/10 P350,000 x 80% x 98% Collections in Sept of Aug sales
47

P 63,000 274,400 P337,400

Answer: B Russon provides 25 percent of next months quantity sales. 25% x P400,000 x 80% = P80,000 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

48

P 45,000 54,000 235,200 P274,400 P608,600