Straight Problem:
1. Basic operating budgets. Bi Love Kita Company is in the process of preparing its
operating budgets for 2006. The company produces and sells only one product
“Habibi”. The following data are taken from its statement of assumptions:
a. Sales and collections. The product is currently sold at a unit price of P150.
The following estimates are developed by the Market Research
Department as probable sales in January 2006:
Unit Sales Probability
40,000 30
50,000 50
60,000 20
Sales in the succeeding months are expected to increase by 10% from
each month thereafter, except for the month of April which is expected to
increase by 20% from the immediately preceding month.
Eighty percent (80%) of sales are to be made in credit with terms of 2/10,
n/40. Billings are made on the date of sales and collections are made as follows:
40% in the month of sales with 55% paying within the discount period
50% in the first month after sale
5% in the second month after sale
5% uncollectibles
The accounts receivable balance on December 31, 2005 is P4,000,000, with
75% of it is coming from the December 2005 sales.
b. Production. The finished goods inventory at the end is each month is set
at 80% of the next month’s sales.
c. Materials. A unit of product Habibi needs 4 lbs. of material X costing P5
per pound. Materials inventory at the end of the each month is estimated
to be 20% of the next month’s needs plus 20,000 lbs. payments to
materials suppliers are 60% in the month of purchase and 40%in the
following month of purchase. The accounts payable balance on December
31, 2005 is P600,000.
d. Labor. It takes 2 hours to produce a unit of product Habibi. On the
average, production workers are paid at a rate of P40 per hour. Payroll
costs amounting to 20% of the total payroll cost per month are estimated
to be paid in the next month.
e. Factory overhead. The standard variable factory overhead rate is P5 per
hour. Total budgeted fixed overhead is set at P6 million to be incurred
evenly during the year. The company’s normal capacity is P50,000 units
per month.
Required: Budgeted operating and financial data for the months of January, February,
and March 2006.
a. Sales in units and in pesos net of allowance for doubtful accounts and discounts.
b. Collections from customer
c. Production
d. Materials purchases in units and in pesos
e. Payments to materials suppliers
f. Direct labor
g. Factory overhead
h. Total production cost
ANSWERS:
Sales in units
January February
(40,000 x 30%) = 12,000 units (49,000 units x 110%) = 53,900 units
(50,000 x 50%) = 25,000 units March
(60,000 x 20%) = 12,000 units (53,200 units x 110%) = 59,290 units
Total 49,000 units
Allowance for doubtful accounts = 5% (Gross sales in pesos x 80%)
January = P7, 350,000 x 80% x 2% = P117, 600
February = P8, 085,000 X 80% x 2% = P129, 360
March = P8, 893,500 x 80% x 2% = P142, 296
Allowance for sales discounts = (Gross sales x 80%) x 40% x 55% x 2%
January = P7, 350,000 x 80% x 40% x 55% x 2% = P25, 872
February = P8, 085,000 X 80% x 40% x 55% x 2% = P28, 459
March = P8, 893,500 x 80% x 40% x 55% x 2% = P31, 305
a. Sales budget
January February March
Sales in units 49,000 53,900 59,290
x Unit sales price P 150 P 150 P 150
Gross sales in 7,350,000 8,085,000 8,893,500
pesos
Allowance for ( 117,600) ( 129,360) ( 142,296)
doubtful accounts
Allowance for sales ( 25,872) (28,459) ( 31,305)
discounts
Net sales in pesos P7,206,528 P7,927,181 P8,719,899
b. Collections from customers
Month of Credit sales January February March Total
sales
2005
November P10.0000 M P 500,000 P 500,000
(P1M/10%)
December 5.0000 M 2,500,000 P 250,000 2,750,000
(P3M / 60%)
2006
January 5.8800 M 1,058,400 2,940,000 294,000 5,560,128
(GSales x 1,267,728
80%)
February 6.4680 M 1,164,240 3,234,000 5,792,741
(GSaies x 1,394,501
80%)
March 7.1148 M 1,533,951 2,814,615
(GSales x 1,280,664
80%)
Collections from credit 5,326,128 5,748,741 6,342,615 17,417,484
customers
Add: Cash sales (20% x 1,470,000 1,617,000 1,778,700 4,865,700
Gross sales)
Total collections from P6,796,128 P7,365,741 P8,121,315 P22,283,184
customers
