OPERATIONAL BUDGETING |1

1. Alpha produces office supplies, including pencils. Pencils are bundled in packages; each package
sell for P20. The sales budget for the first four months of the year follows for this product.

Unit Sales

January 100,000

February 120,000

March 110,000

April 100,000

Company policy requires that ending inventories for each month be 10% of next month’s sales. However,
due to greater sales in December than anticipated, the ending inventory of pencils for that month is only
5,000 packages.

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

2. Bravo produces a variety of labels, including iron-on name labels, which are sold to parents of
camp-bound children. (The camps require campers to have their name on every article of
clothing.) each roll consists of 10 yards of paper strip with 500 copies of the child’s name. each
yard of paper strip costs P2. B has budgeted production of the label rolls for the next four months
as follows:

March April May June

Rolls in units 6,000 9,000 15,000 10,000

Inventory policy requires that sufficient paper strip be in ending monthly inventory to satisfy 25% of the
following month’s production needs. The inventory of paper strip at the beginning of March equals
exactly the amount needed to satisfy the inventory policy.

A. Prepare a direct materials purchase budget for March, April and May showing purchases in
units and in pesos for each month and in total.
B. Each roll of labels produced requires (on average) 0.05 direct labor hour. The average cost of
direct labor is P60 per hour. Prepare a direct labor budget for March, April, and May showing
the hours needed and the direct labor cost for each month and in total.

3. The production budget of Charlie corporation for the upcoming fiscal year is as follows:

1Q 2Q 3Q 4Q

Budgeted Production in units 2,000 2,050 2,125 1,950

Each unit requires 4 hours of direct labor. The company’s variable manufacturing overhead rate is P5 per
direct labor hour and the company’s fixed manufacturing overhead is P50,000 per quarter. The only non-
cash item included in fixed manufacturing overhead is depreciation, which is P20,000 per quarter.

A. Construct the company’s manufacturing overhead budget for the upcoming fiscal year.
 OPERATIONAL BUDGETING |2

B. Compute the company’s manufacturing overhead rate (including both variable and fixed
manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole cent.

4. Delta, a one product mail-order firm, buys its product for P75 per unit and sells it for P140 per
unit. The sales staff receives a 10% commission on the sale of each unit. Its March income
statement follows:

Delta Inc.

Income Statement

For the Month Ended March 31, 2019

Sales P1,400,000.00

Cost of Goods Sold 750,000.00

Gross Profit 650,000.00

Expenses

Sales Commission (10%) 140,000

Advertising 215,000

Store Rent 26,000

Administrative Salaries 42,000

Depreciation 52,000

Other Expenses 13,000

Total Expenses 488,000.00

Net Income P 162,000.00

Management expects March’s results to be repeated in April, May and June of 2019 without any changes
in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate
of 10% each month for the next three months (beginning with April) if the item’s selling price is reduced
to P130 per unit and advertising expenses are increased by 20% and remain at that level for all three
months. The cost of its products will remain at P75 per unit, the sales staff will continue to earn a 10%
commission, and the remaining expenses will stay the same.

Prepare the budgeted income statements for each of the months of April, May and June that show the
expected results from implementing the proposed changes. Use a three-column formant with one-column
for each month.

5. The balance sheet for Echo at December 31, 2019 is as follows:

Assets

Cash P 90,000

Accounts Receivable 120,000

Inventory 130,000

Property, Plant and Equipment, net 350,000

Total assets P690,000

Liabilities and Equity

Accounts Payable P 80,000

Capital Stock 300,000

Retained Earnings 310,000

Total Liabilities and Equity P690,000

For the year ended 2020, cash receipts are estimated at P860,000, representing collection of accounts
receivable. Cash payments are budgeted at P830,000. Included in these payments is P150,000 for various
expenses that do not flow through accounts payable. Credits for the accounts payable for the year are
estimated at P740,000, all merchandise purchases. All cash payments are for expenses or purchases.
Depreciation expense is P60,000. Net sales are estimated at P1,200,000. The inventory of merchandise is
expected to increase to P150,000 by the end of the year. Income tax is estimated at 30% and will be paid
after December 31, 2020.

From the information given, prepare a budgeted balance sheet at December 31, 2020. Prove the retained
earnings balance by computing the net income.

6. Flower found that about 20% of its sales during the month were for cash. Flower has the
following accounts receivable payment experience:
% paid in the month of sale 40%
% paid in the month after the sale 50%
% paid in the 2nd month after the sale 8%

Flower’s anticipated sales for the next few months are:

Prepare a cash receipt budget for July and August.