STRATEGIC COST MANAGEMENT
Coke Company is preparing budgets for the second quarter ending June 30.
• Budgeted sales of the company’s only product for the next five months are:
April.......... 20,000 units
May........... 50,000 units
June.......... 30,000 units
July........... 25,000 units
August....... 15,000 units
• The selling price is P10 per unit.
1. SALES BUDGET
SCHEDULE OF EXPECTED CASH COLLECTIONS
Additional data:
All sales are on account.
The company collects 70% of these credit sales in the month of the sale; 25% are collected in the month
following sale; and the remaining 5% are uncollectible.
The accounts receivable balance on March 31 was $30,000. All of this balance was collectible.
2. PRODUCTION BUDGET
Additional data:
• The company desires to have inventory on hand at the end of each month equal to 20%
of the following month’s budgeted unit sales.
• On March 31, 4,000 units were on hand.
3. DIRECT MATERIALS BUDGET
Additional data:
• 5 pounds of material are required per unit of product.
• Management desires to have materials on hand at the end of each month equal to 10% of
the following month’s production needs.
• The beginning materials inventory was 13,000 pounds.
• The material costs P0.40 per pound.
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR MATERIAL
Additional data:
• Half of a month’s purchases are paid for in the month of purchase; the other half is paid for
in the following month.
• No discounts are given for early payment.
• The accounts payable balance on March 31 was P12,000.
4. DIRECT LABOR BUDGET
Additional data:
• Each unit produced requires 0.05 hour of direct labor.
• Each hour of direct labor costs the company P10.
• Management fully adjusts the workforce to the workload each month.
5. MANUFACTURING OVERHEAD BUDGET
Additional data:
• Variable manufacturing overhead is P20 per direct labor-hour.
• Fixed manufacturing overhead is P50,500 per month. This includes P20,500 in depreciation,
which is not a cash outflow.
6. ENDING FINISHED GOODS INVENTORY BUDGET
Additional data:
• Royal Company uses absorption costing in its budgeted income statement and balance
sheet.
• Manufacturing overhead is applied to units of product on the basis of direct labor-hours.
• The company has no work in process inventories.
7. SELLING AND ADMINISTRATIVE EXPENSE BUDGET
Additional data:
• Variable selling and administrative expenses are P0.50 per unit sold.
• Fixed selling and administrative expenses are P70,000 per month and include P10,000 in
depreciation.
8. CASH BUDGET
Additional data:
1. A line of credit is available at a local bank that allows the company to borrow up to
P75,000.
a. All borrowing occurs at the beginning of the month, and all repayments occur at the
end of the month.
b. Any interest incurred during the second quarter will be paid at the end of the quarter.
The interest rate is 16% per year.
2. Royal Company desires a cash balance of at least P30,000 at the end of each month. The
cash balance at the beginning of April was P40,000.
3. Cash dividends of P51,000 are to be paid to stockholders in April.
4. Equipment purchases of P143,700 are scheduled for May and P48,800 for June. This
equipment will be installed and tested during the second quarter and will not become
operational until July, when depreciation charges will commence.
9. BUDGETED INCOME STATEMENT
10. BUDGETED BALANCE SHEET
BEGINNING BALANCE SHEET
Royal Company
Balance Sheet
March 31
Current assets:
Cash............................................................... P 40,000
Accounts receivable......................................... 30,000
Raw materials inventory.................................. 5,200
Finished goods inventory................................. 20,000 P 95,200
Plant and equipment:
Land............................................................... 400,000
Buildings and equipment.................................. 1,610,000
Accumulated depreciation................................ (750,000) 1,260,000
Total assets........................................................ P1,355,200
Liabilities:
Accounts payable............................................ P 12,000
Stockholders’ equity:
Common stock................................................ P 200,000
Retained earnings........................................... 1,143,200 1,343,200
Total liabilities and stockholders’ equity................ P1,355,200
