NATIONAL COLLEGE OF BUSINESS AND ARTS

Cubao-Fairview-Taytay

MANAGEMENT ADVISORY SERVICES OCTOBER 2022 BATCH

TOPIC 8: OPERATION BUDGETING

BUDGET

Budget
- Is a quantitative plan for acquiring and using resource over a specified time period.
- A financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the
policy to be pursued during that period for the purpose of attaining a given objective. It may include
income, expenditure and employment of capital.

Budgeting System – the procedures used to develop a budget. The primary purposes are:
1) Planning. Quantify a plan of action
 Strategic Planning – long-range organizational goals and the strategies and policies that will help
achieve those goals
 Tactical planning – usually a short-term plan that determines how the strategic plans will be achieved.
2) Facilitating Communication and Coordination. Managers throughout the organization must be aware of
the plans made by other managers
3) Allocating Resources. Provide means of allocating limited resources among competing uses.
4) Controlling Profit and Operations. Using the budget as a benchmark with which actual results can be
compared.
5) Evaluating Performance and Providing Incentives.

Elements of Successful Budgetary Process

1. Depends on a sound organizational structure with authority and responsibility for all phases of operations
clearly defined
a. Top management must be enthusiastic and committed to the budget process.
b. Top management must not use the budget to pressure employees or blame them when something
goes wrong.
c. Highly achievable budget targets are usually preferred when managers are rewarded based on
meeting budget targets
2. Based on research and analysis with realistic goals
3. Coordinating business activities
4. Communicating the budgets
5. Accepted by all levels of management
6. Reasonable Flexibility
7. In relation to Responsibility Accounting – Managers should be held responsible for those items – and only
those items – that they can actually control.

Advantage and Limitations of Budgeting

Advantage of Budgeting Limitations of a Budget
1. Communicate management’s plans 1. It takes considerable amount of resources (time, costs,
throughout the organizations etc.) to develop.
2. Force managers to think and plan for future 2. At the end of the day, budgets are still a type of forecast
3. Allocate resources where they can be used (no matter how knowledge-based or scientific-base)
most effectively requires judgment and guessing which may or may not
4. Uncover potential bottlenecks. occur – needs for modification and/or revisions.
5. Coordinate the activities of the entire 3. Cooperation and participation of the different level of
organization the organization is required.
6. Serve as benchmarks for evaluating 4. A budget is an aid to management not a substitute for
subsequent performance. management
TOPIC 7 OPERATION BUDGETING PAGE 2

Budget Committee
 In large organizations, is composed of executives-in-charge of major functions of the business and
includes the sales manager, human resource manager, finance manager, the production manager, the
chief engineering, the treasurer, and the chief accounts officer, among others.
 Functions of the Budget Committee:
o Responsible for the overall policies and objectives relating to the budget
o Coordinating the preparation of the budget
o Review individual budgets concerning different organizational segments
o Resolving disputes related to the budget
o Approve budgets which act as an authority/target for departmental action

Budget Manual
A document which defines the responsibilities of persons engaged in a budgetary program and sets out the
routine, the forms, and records required under budgeting. It specifies the procedures to be followed in developing
the budget.

TYPES OF BUDGETS

1. As to activity base
a. Static – projection of budget data using one level of activity and ignoring different levels of
activity.
b. Flexible – projection of budget data for various level of activity.
2. As to approaches/basis of preparation
a. Incremental Budgeting – the starting point for the new budget is the budget for the previous year
adjusted (increase/decreased) for inflation and other known changes.
b. Rolling Budgeting - kept continuously up to date by adding another accounting period (e.g. month
or quarter) when the earliest accounting period has expired.
c. Zero-Based Budgeting - each organizational unit is assumed to require no resources and all
budgetary requests must be fully justified in terms of the element’s continued usefulness
d. Activity-Based Budgeting - a method of budgeting based on an activity framework, using cost
driver data in the budget setting and variance feedback processes.
3. As to coverage – generally, the longer the time frame the less detailed the budget
a. Current Budgets – prepared for the current operations of the business. The planning period of a
budget generally expressed in months or even in weeks
b. Short-term (Operational) Budget – one that is related to current conditions and usually prepared
on an annual basis and then broken into either quarterly or monthly budget.
c. Long-term Budget – one that is established as a plan for the long-term development of the
business and covers a period of between 3 to 20 years.
4. As to subject matter:
a. Master Budget – usually prepared annually for the upcoming years, it consist of different financial
schedules intertwined with one another ultimately producing projected financial statements.
i. Operational Budget
1. Sales Budget
2. Production Budget
3. Purchase & Direct Materials Budget
4. Direct Labor Budget
5. Manufacturing Overhead Budget
6. Selling and Administrative Budget
7. Budgeted Income Statement
ii. Financial Budget
1. Cash Budget
2. Budgeted Balance Sheet
b. Capital Budget – covers the different investment projects of the business (will be discussed
extensively in future hand-outs)
5. As to parties involve:
a. Participative Budget (Self-Imposed)– a financial plan develop through collaborative efforts of top
executive and operation personnel. Also called Bottoms-Up Budgeting
b. Imposed Budgeting – a financial plan develop by top level executive with little or no consultation
with the operation personnel. Also called Top-Down Budgeting
TOPIC 7 OPERATION BUDGETING PAGE 3

c. Parallel or Negotiated Budgeting – Combines participative and imposed budgeting, wherein one
party will do the initial budgeting while the other party will make the counter offer.

THE MASTER BUDGET

Master Budget consists of a number of separate but interdependent budgets that formally lay out the company’s
sales, production, and financial goals.

SALES BUDGET
 The first step in developing master budget.
 Based on sales forecast for services or goods.
Major Factors considered when Forecasting Sales
o Past level sales and trends
o General economic trends
o Economic trends in the company’s industry
o Other factors expected to affect sales in the industry
o Political and legal events
o Intended pricing policy of the company
o Planned advertising and product promotion
o Expected actions of competitors
o New product contemplated by the company or other firms
o Market research studies
 Sales Budget is projected by displaying the budgeted sales in units for a period then multiplied by the unit
sales price to determine the sales revenue

Formula:
Budgeted sales in units XX
Multiply by: Unit sales price PXX
Total sales revenue PXX

PRODUCTION BUDGET
 Shows the number of units of services or goods that are to be produced during a budget period.
 Production requirements are influenced by the desired ending inventory that is intended to provide some
cushion in the event that problems develop in production or sales increase unexpectedly.
 If production capability will not be enough to cover for the forecasted sales, the following actions may be
considered by management: sub-contracting, overtime, work-shifting, purchasing or leasing additional
machinery, purchase bought-out components, improvements in the method of production, etc.
Formula:
Budgeted sales in units XX
Add: Desired ending finished goods inventory XX
Total units required XX
Less: beginning finished goods inventory (XX)
Required units to be produced XX

DIRECT MATERIALS BUDGET

 Shows the number of units and the cost of materials to be purchased and used during a budget period.
 Separate budget will be prepared for each of the direct materials component of a product.
Formula:
Required units to be produced XX
Multiply: Direct Materials required per unit XX
Direct Materials Unit required for Production XX
Add: Desired Ending Direct materials inventory XX
Total Required (Total Materials Available for Use) XX
Less: Beginning Direct Materials Inventory (XX)
Required Direct Materials to be Purchased XX

DIRECT LABOR BUDGET

TOPIC 7 OPERATION BUDGETING PAGE 4

 Shows the number of hours and the cost of the direct labor to be used during the budget period

Formula:
Required units to be produced XX
Multiply by: Direct Labor Time Per Unit XX
Total Direct Labor Hours Required XX
Multiply by: Direct Labor Cost Per Hour PXX
Total Budgeted Direct Labor Cost PXX

MANUFACTURING OVERHEAD BUDGET

 Sows the cost of overhead expected to be incurred in the production process during the budget period.

Formula:
Required units to be produced XX
Multiply by: Chosen activity base time Per Unit XX
Total Activity Base Hours Required XX
Multiply by: Variable Overhead Cost Per Activity Base PXX
Budgeted Variable Overhead Costs XX
Add: Budgeted Fixed Overhead Costs PXX
Total Budgeted Manufacturing Overhead PXX

SELLING, GENERAL AND ADMINISTRATIVE BUDGET

 Shows the planned amounts of expenditures for selling, general, administrative expenses during a budget
period.
Formula:
Budgeted sales in units XX
Multiply by: Variable Selling & Administrative Cost per unit PXX
Budgeted Variable Selling & Administrative PXX
Add: Budgeted Fixed Selling & Administrative XX
Total Budgeted Selling & Administrative Expenses PXX
BUDGETED INCOME STATEMENT
 Important end-product of the operating budgets since it indicates expected profitability of operations and
provides a basis for evaluating company performance
 Prepared from the operating budgets:
o Sales Budget, Production Budget*, Direct Materials Budget*, Direct Labor Budget*, Manufacturing
Overhead Budget*, Selling and Administrative Expense Budget
*will be used to compute for the budgeted Cost of Goods Sold.

CASH BUDGET
 The cash budget is composed of four major parts:
1) The receipts section – list of all cash inflows, except from financing, expected during the budget period.
Generally, the major source of receipts is from sales
2) The disbursements section – summarizes all cash payments that are planned for the budget period. cash
purchases, payment of payables, direct labor payments, selling and administrative budget less non-cash
expenses like depreciation
3) The cash excess or deficiency section
4) The financing section
 Financing is needed when the cash is below the desired ending cash balance that management would
like to have.
 Borrowing is assumed to have been made at the beginning of the period and payment is made when
there is already sufficient cash.
 Interest payments are made at the time of settlement of the Principal.

Formula:
Beginning cash balance PXX
Add: Cash Receipts XX
Total available cash XX
Less: cash disbursement (XX)
TOPIC 7 OPERATION BUDGETING PAGE 5

Excess (deficiency) of available cash over disbursements XX/(XX)

Financing: Borrowings* / (Payments) XX/(XX)
Ending cash balance PXX
*Borrowings (if desired ending cash balance is greater than excess of cash over disbursements):
Desired ending cash balance PXX
Less: excess of available cash over disbursements (XX)
Add: deficiency of available cash over disbursements XX
Required borrowings PXX

BUDGETED BALANCE SHEET

 Shows the expected end-of-period balances for the company’s assets, liabilities, and owner’s equity, assuming
that planned operations are carried out.
 Developed from the budgeted balance sheet for the preceding year and the budgets for the current year
 Has the same format with the regular financial statement – however, it is based on budgeted data.

Format:
Cash (from the Cash Budget) PXX
Receivable (from Sales and Collection Budget) XX
Inventory (from the production & purchase budget) XX
Property, Plant & Equipment (Beginning Balance adjusted for any addition/disposal and
depreciation) XX
TOTAL ASSETS PXX

Accounts Payable (from Purchase Budget) PXX

Other Payables (from Financing Section of the cash budget) XX
TOTAL LIABILITIES PXX
Paid In Capital (adjusted for sale of shares, if there’s any) XX
Retained Earnings (Beginning Balance plus net income from the income statement less
any dividends) XX
TOTAL LIABILITIES & EQUTIY PXX

FLEXIBLE BUDGETING

1) Purpose:
a. To bridge the gap between planning budget and actual performance and to isolate each
difference, a flexible budget is constructed based on the actual level of activity and the revenue
and cost formulas from the planning budget.
b. The planning or static budget is a “best guess” as to what the actual performance will be during
the budget period. Needless to say, rarely does actual performance match the planning budget.
c. The differences between the planning budget and actual performance are due to two basic
causes: differences in activity level and differences in spending.
2) Comparing Static and Flexible Budgeting
Fixed (Static) Budget Flexible Budget
1. Projection of budget data at one level of activity 1. Projects budget data for various levels
2. Ignores data for different levels of activity of activity
3. Always compares actual results with the budget data 2. Essentially, a series of static budgets at
at the activity level used in the master budget different activity levels
4. Appropriate for evaluating a manager’s effectiveness 3. Budgetary process more useful if it is
in controlling costs when the actual level of activity adaptable to changes in operating
closely approximates the master budget activity conditions
level and behavior of the costs is fixed in response to 4. Can be prepared for each type of
changes in activity. budget in the master budget
5. Appropriate for fixed costs
6. Not appropriate for variable costs
In computing variances
1. Compare the budgeted and actual amount 1. Identify variable costs and determine
disregarding any difference in activity level. the rate per unit.
2. Multiply the rate per unit to the actual
TOPIC 7 OPERATION BUDGETING PAGE 6

activity level – serving as the budgeted

amount.
3. Determine variances by comparing the
newly computed budgeted amount
and the actual amount.
3) Variances
a. Activity Variance
i. Difference between a revenue or cost item in the static budget and the same item in the
flexible budget.
ii. Results from the difference between the level of activity assumed in the planning budget
and the actual level of activity used in the flexible budget.
b. Revenue Variance
i. Difference between how much the revenue should have been at the actual level of
activity and the actual revenue for the period.
ii. Favorable revenue variance occurs when the revenue is greater than expected at the
actual level of activity for the period.
iii. Unfavorable revenue variance occurs when the revenue is less than expected at the
actual level of activity for the period.
c. Spending Variance
i. Difference between how much an expense should have been at the actual level of activity
and the actual amount of expense incurred.
ii. Favorable spending variance occurs when the cost is less than expected at the actual level
of activity for the period.
iii. Unfavorable spending variance occurs when the cost is greater than expected at the
actual level of activity for the period.

DISCUSSION QUESTIONS

Problem 1(Sales Budget) Cavite Corporation last year sold 200 units of Product X at P2 per unit, 100 units of
Product Y at P3 per unit, and 500 units of Product Z at P1 per unit. Next year, Cavite expects to sell 50% more
units of Product X, the same number of units of Product Y and 20% fewer units of Product Z.
Required: Assuming that Cavite’s selling price will remain the same next year, prepare a sales budget

Problem 2 (Production Budget) Laguna Corporation, a chair manufacturer, expects to sell 100 units during
the upcoming year. Laguna presently has 10 chairs in inventory and desires to have an ending inventory of 40
chairs.
Required: How many chairs must Laguna produce during the upcoming year?

Problem 3 (Production Budget) The production manager of Guimaras Corporation plans to have an
inventory on hand at the end of each month that will be equal to 60% of the sales of the following month. This
requirement was met at the end of June. A sales budget for the next 4 months is as follows:
Month Units
July 40,000
August 40,000
September 50,000
October 50,000
Required: Prepare a production budget for the next quarter.

Problem 4 (Purchase Budget) Batangas Corporation uses 3 pounds raw material to produce one finished unit
of its principal product. Batangas has compiled the following information on its inventories for the month of
August:
Beginning Desired Ending
Inventory Inventory
Raw Materials 10 pounds 12 pounds
Work In Process None None
Finished Goods 4 units 3 units

Required: If Batangas expects to sell 21 units during August, how many pounds of raw materials should it
purchase during August and how much is the expected cost if the raw materials cost P1 per pound?
TOPIC 7 OPERATION BUDGETING PAGE 7

Problem 5 (Purchase Budget) Romblon Corporation plans to produce the following quantities of product in
each of the months given below:
Months Units
October 15,000
November 25,000
December 30,000
January 35,000
Materials are to be purchased in the month before they are needed in production. This requirement was met on
October 1. Three units of material C, each costing P3, is required per unit of product. Two units of Material B,
each unit costing P5, is required for a unit of product.

Required: Prepare a purchase budget for each material showing the number of units and the total cost for each
month and in total for the fourth quarter.

Problem 6 (Direct Labor and Manufacturing Overhead Budget) The initial survey of the budget
committee of Nueva Vizcaya Corporation indicates a sales forecast of 95,000 plastic dolls. Management also
plans to produce an additional 5,000 dolls for stock. Budgeted factory overhead expenses for this production
schedule amount to:
Fixed Factory Overhead
Depreciation – Buildings P 500
Depreciation – Equipment 800
Supervision 3,200
Insurance 220
Variable Factory Overhead
Indirect Labor P 0.250 per direct labor hour
Indirect supplies P 0.004 per unit
General Factory P 0.050 per direct labor hour
Labor hours required per unit and rates for the two operations are:
Plastic molder .02 hour per unit at P3.20 per hour
Painter .012 hour per unit at P3.00 per hour

Required: Prepare a direct labor and manufacturing overhead budget.

Problem 7 (Cash Budget – Receipts) Bulacan Corporation expects to have sales of P150,000 this month and
P100,000 next month. Typically, 80% of Bulacan Corporation’s sales are for credit. 40% of the company’s credit
sales are collected in the month in which they take place and the remainder is collected in the month following
the month in which the sales took place.

Required: What is Bulacan Corporation’s budgeted cash receipt for next month?

Problem 8 (Cash Budget–Receipts) Judging by management’s experience with similar organizations,

Sorsogon Corporation forecast their collection pattern for Accounts Receivable as follows:
 Twenty percent of the credit sales are collected after the end of the month of sales but within the
discount period.
 An additional 70 percent of credit sales are collected in the month following the sale after the discount
period has expired.
 An additional 5 percent of credit sales are collected within the second month after the sale is made.
Operations began on January 1. Management has agreed to offer cash discounts for credit sales only on a term
of 3/10 EOM, n/60. Cash and credit sales by month are forecast as follows:
Cash Sales Credit Sales
January P 6,000 P 20,000
February P 5,000 P 30,000
March P 8,000 P 38,000

Required: prepare the cash receipts budget by month for the first quarter of the year.

Problem 9 (Cash Budget – Disbursements) Three ounces of musk oil are required for each bottle of
“gayuman” a very popular perfume. The cost of the musk oil is P3 per ounce. Scheduled production of
“gayuman” for 2014 is given below, by quarters:
1st 2nd 3rd 4th
Production (in bottles) 8,000 10,000 18,000 6,000
Musk oil has become so popular as a perfume base that it has become necessary to carry large inventories as a
precaution against stock-outs. For this reason, the inventory of musk oil at any quarter must not be less than
25% of the following quarter’s production needs. Purchases are paid 60% in the month of purchase and 40% in
the following month.
Required:
1. Compute the budgeted purchases of musk oil for 1st, 2nd and 3rd quarter.
2. Compute the cash payments for the 2nd and 3rd quarter.
3. How much is the accounts payable at the end of the 3rd quarter.
4. If the accounts payable at the beginning of the year was P12,000, how much was the purchase in the
last quarter of 2013?
TOPIC 7 OPERATION BUDGETING PAGE 8

Problem 10 (Minimum Cash Balance): Monroe Products is preparing a cash forecast based on the following
information.
• Monthly sales: December P200,000; January P200,000; February P350,000; March P400,000.
• All sales are on credit and collected the month following the sale.
• Purchases are 60% of next month’s sales and are paid for in the month of purchase.
• Other monthly expenses are P25,000, including P5,000 of depreciation.
If the January beginning cash balance is P30,000, and Monroe is required to maintain a minimum cash balance
of P10,000, how much short-term borrowing will be required by the end of February?

Problem 11 (Flexible Budget) Bataan Corporation prepared the following static master budget at the start of
the current year based on its projected sales level of 100 units:
Sales P400
Cost of Sales
Variable (100)
Fixed (100)
Gross Profit 200
Variable Overhead Costs (100)
Fixed Overhead Costs ( 95)
Net Income P 5

Required: Using the information conveyed by this static budget, prepare a flexible budget for Bataan
Corporation at sales level of 90 units and 110 units.

Problem 12 (Flexible Budget) Shaker’s Pizza is a family-owned restaurant that serves pizza and Italian
dishes. Data concerning the restaurant’s monthly revenues and costs appear below:
Formula
Revenue P12 per unit
Cost of Ingredients P3.50 per unit
Wages P7,500 per month
Utilities P600 per month+ P0.20q
Rent P2,500 per month

Required:
1. Prepare the diner’s planning budget for January assuming that 1,500 meals are served.
2. Assume that 1,600 meals were served in January. Prepare a flexible budget for this level of activity.
3. Actual results for January appear below. Prepare a flexible budget performance report for the diner for
January.
Revenue P18,800
Cost of ingredients 5,200
Wages 7,200
Utilities 928
Rent 2,500

QUIZZER:
1. Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of
P715,000 in July, P728,000 in August, and P624,000 in September. Hannon’s policy is to have on hand
enough inventory at the end of the month to cover 25% of the next month’s sales. What will be the cost of
the inventory that Hannon should budget for purchase in August?
a. P509,600
b. P540,000
c. P560,000
d. P680,000
2. Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be
65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and
66,000 units in the fourth quarter. Streeter maintains a finished goods inventory at the end of each quarter
equal to one half of the units expected to be sold in the next quarter. How many units should Streeter
produce in the second quarter?
a. 72,000 units
b. 75,000 units
c. 78,000 units
d. 84,000 units
3. Ming Company has budgeted sales at 6,300 units for the next fiscal year, and desires to have 590 good
units on hand at the end of that year. Beginning inventory is 470 units. Ming has found from past
experience that 10% of all units produced do not pass final inspection, and must therefore be destroyed.
How many units should Ming plan to produce in the next fiscal year?
a. 6,890
b. 7,062
c. 7,133
d. 7,186
TOPIC 7 OPERATION BUDGETING PAGE 9

4. Savior Corporation assembles backup tape drive systems for home microcomputers. For the first quarter,
the budget for sales is 67,500 units. Savior will finish the fourth quarter of last year with an inventory of
3,500 units, of which 200 are obsolete. The target ending inventory is 10 days of sales (based upon 360
days). What is the budgeted production for the first quarter?
a. 75,000
b. 71,700
c. 71,500
d. 64,350
5. Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be
65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter and
66,000 units in the fourth quarter. Streeter usually maintains a finished goods inventory at the end of each
quarter equal to one half of the units expected to be sold in the next quarter. However, due to a work
stoppage, the finished goods inventory at the end of the first quarter is 8,000 units less than it should be.
How many units should Streeter produce in the second quarter?
a. 75,000 units
b. 78,000 units
c. 80,000 units
d. 86,000 units
6. Stevens Company manufactures electronic components used in automobile manufacturing. Each
component uses two raw materials, Geo and Clio. Standard usage of the two materials required to
produce one finished electronic component, as well as the current inventory, are shown below.
Material Standard Per Unit Price Current Inventory
Geo 2.0 pounds P15/lb. 5,000 pounds
Clio 1.5 pounds P10/lb. 7,500 pounds

Stevens forecasts sales of 20,000 components for the next two production periods. Company policy
dictates that 25% of the raw materials needed to produce the next period’s projected sales be maintained
in ending direct materials inventory. Based on this information, the budgeted direct material purchases for
the coming period would be
a. Geo P450,000; Clio P450,000
b. Geo P675,000; Clio P300,000
c. Geo P675,000; Clio P400,000
d. Geo P825,000; Clio P450,000
7. Petersons Planters Inc. budgeted the following amounts for the coming year.
Beginning inventory, finished goods P 10,000
Cost of goods sold 400,000
Direct material used in production 100,000
Ending inventory, finished goods 25,000
Beginning and ending work-in-process inventory Zero

Overhead is estimated to be two times the amount of direct labor pesos. The amount that should be
budgeted for direct labor for the coming year is
a. P315,000
b. P210,000
c. P157,500
d. P105,000
8. Swan Company is a maker of men's slacks. The company would like to maintain 20,000 yards of fabric in
ending inventory. The beginning fabric inventory is expected to contain 25,000 yards. The expected yards
of fabric needed for sales is 90,000.
Compute the yards of fabric that Swan needs to purchase.
a. 85,000
b. 90,000
c. 95,000
d. 135,000
9. In preparing the direct material purchases budget for next quarter, the plant controller has the following
information available.
Budgeted unit sales 2,000
Pounds of materials per unit 4
Cost of materials per pound P3
Pounds of materials on hand 400
Finished units on hand 250
Target ending units inventory 325
Target ending inventory of pounds of materials 800

How many pounds of materials must be purchased?

a. 2,475
b. 7,900
c. 8,700
d. 9,300
TOPIC 7 OPERATION BUDGETING PAGE 10

10. Granite Company sells products exclusively on account, and has experienced the following collection
pattern: 60% in the month of sale, 25% in the month after sale, and 15% in the second month after sale.
Uncollectible accounts are negligible. Customers who pay in the month of sale are given a 2% discount. If
sales are P220,000 in January, P200,000 in February, P280,000 in March, and P260,000 in April, Granite’s
accounts receivable balance on May 1 will be
a. P107,120
b. P143,920
c. P146,000
d. P204,000
11. Brown Company estimates that monthly sales will be as follows.
January P 100,000
February 150,000
March 180,000
Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the
month following the sale, and 10% are collected two months after the sale. Brown’s accounts receivable
balance as of December 31 totals P80,000 (P72,000 from December’s sales and P8,000 from November’s
sales). The amount of cash Brown can expect to collect during the month of January is
a. P76,800
b. P84,000
c. P108,000
d. P133,000
12. Bootstrap Corporation anticipates the following sales during the last six months of the year.
July P460,000
August 500,000
September 525,000
October 500,000
November 480,000
December 450,000
20% of Bootstrap’s sales are for cash. The balance is subject to the collection pattern shown below.
Percentage of balance collected in the month of sale 40%
Percentage of balance collected in the month following sale 30%
Percentage of balance collected in the second month
following sale 25%
Percentage of balance uncollectible 5%
What is the planned net accounts receivable balance as of December 31?
a. P279,300
b. P294,000
c. P360,000
d. P367,500
13. Prudent Corporation’s budget for the upcoming accounting period reveals total sales of P700,000 in April
and P750,000 in May. The sales cash collection pattern is
20% of each month’s sales are cash sales.
5% of a month’s credit sales are uncollectible.
70% of a month’s credit sales are collected in the month of sale.
25% of a month’s credit sales are collected in the month following the sale.
If Prudent anticipates the cash sale of a piece of old equipment in May for P25,000, May’s total budgeted
cash receipts would be
a. P560,000
b. P702,500
c. P735,000
d. P737,500
14. ANNCO sells products on account, and experiences the following collection schedule.
In the month of sale 10%
In the month after sale 60%
In the second month after sale 30%
At December 31, ANNCO reports accounts receivable of P211,500. Of that amount, P162,000 is due from
December sales, and P49,500 from November sales. ANNCO is budgeting P170,000 of sales for January.
If so, what amount of cash should be collected in January?
a. P129,050
b. P174,500
c. P211,500
d. P228,500
15. Data regarding Johnsen Inc.’s forecasted peso sales, of which 30% are cash sales, for the last seven
months of the year and Johnsen’s projected collection patterns are as follows.
Forecasted sales
June P700,000
July 600,000
August 650,000
September 800,000
October 850,000
TOPIC 7 OPERATION BUDGETING PAGE 11

November 900,000
December 840,000
Collection pattern on credit sales (5% determined to be uncollectible)
During the month of sale 20%
During the first month following the sale 50%
During the second month following the sale 25%
Johnsen’s budgeted cash receipts from sales and collections on account for September are
a. P635,000
b. P684,500
c. P807,000
d. P827,000
16. On budgeting, all of the following are not valid, except:
a. Responsibility budget identifies revenue and costs with the individual responsible for their occurrence
b. The best way to establish budget figures is to use last year’s 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.
17. Considering budgeting concepts and principles, which of the following statements is not applicable?
a. The only difference between a flexible budget and a static budget is that a flexible budget does not
contain fixed costs
b. A flexible budget is geared toward a range of activity rather than toward a single level of activity.
c. Although it is effective in measuring production control, a static budget is not effective in measuring
cost control.
d. The flexible budget is often used as a basis for preparing the pre-determined overhead rate.
18. The following information were made available for Futuristics Inc.:
June 30 cash balance P 900,000
Dividends paid in July P 240,000
Cash expenditures in July for operating expenses P 736,000
Depreciation expense in July P 90,000
Cash collections in July P ,780,000
Merchandise purchase paid in cash in July P 1,124,000
Purchased equipment for cash in July P 350,000
It was the company’s policy to keep a minimum cash balance of P 200,000. The company:
a. Had to borrow P 200,000
b. Did not borrow since its ending cash balance amounted to P 200,000
c. Did not borrow with its ending cash balance amounting to P 230,000
d. Had to borrow P 60,000
19. Soulful Inc. desires to reduce its inventory of a particular raw material by 40%. The inventory at the
beginning of the budget period is 240,000 units and the company plans to manufacture 168,000 units of
output. Each of these units requires 2.5 units of the raw materials. How much of the raw materials should
be purchased during the budget period?
a. 316,000 units
b. 276,000 units
c. 324,000 units
d. 139,600 units
20. Beatless Corp. plans to sell 200,000 units of Let-it-Bee product in July and anticipates a growth in sales of
5% per month. The target ending inventory in units of the product is 80% of the next month’s estimated
sales. There are 150,000 units in inventory as of the end of June. The production requirement in units of
:Let-it-Be for the quarter ending September 30 would be
a. 670,560
b. 691,525
c. 665,720
d. 675,925
21. Pera Inc. prepared the following sales budget:
Month Cash Sales Credit Sales
February P 80,000 P 340,000
March P 100,000 P 400,000
April P 90,000 P 370,000
May P 120,000 P 460,000
June P 110,000 P 380,000
Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months
following the sale. The remaining 5% is expected to be uncollectible. The company’s total budgeted
collection from April to June amounts to:
a. P 1,090,250
b. P 1,325,500
c. P 1,468,500
d. P 1,397,500
22. Pranic Corp. uses flexible budgeting for cost control. It produced 5,400 units of product for the month just
ended incurring an indirect materials cost of P26,000. Its master budget for the year showed an indirect
TOPIC 7 OPERATION BUDGETING PAGE 12

materials cost of P360,000 at a production volume of 72,000 units. A flexible budget for the month just
ended would show indirect material cost of:
a. P 27,000
b. P 26,000
c. P 27,950
d. P 23,400
23. Premised on past experience Mayo Corp. adopted the following budgeted formula for estimating shipping
expenses. The company’s shipments averaged 12 kilos per shipment:
Shipping Costs = P 8,000 + (P0.25 x Kgs. Shipped)
Pertinent data for the current month are given below:
Planned Actual
Sales order 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales 240,000 288,000
Total kilos shipped 9,600 12,300
The actual shipping costs for the month amounted to P10,500. The appropriate monthly flexible budget
allowance for shipping costs for purposes of performance evaluation would be:
a. P 10,250
b. P 11,075
c. P 10,340
d. P 10,400
24. Games Corp. expected to sell 150,000 board games for July. Its master budget related to the sale and
production of these items is presented below:
Revenue 480,000
Cost of Goods Sold
Direct Materials 135,000
Direct Labor 60,000
Variable Overhead 90,000 285,000
Contribution margin 195,000
Fixed Overhead 50,000
Fixed Selling and Administrative 100,000
Operating Income 45,000
July’s sales registered at 180,000 board games. Using a flexible budget the company expects the operating
income for July to be:
a. P 102,000
b. P 270,000
c. P 84,000
d. P 45,000
25. The following results are available for the production department of Gizmo ltd for May:
Budget 10,000 units Actual 12,000 units
Direct Materials 26,000 28,000
Direct Labor 14,000 17,000
Variable Overhead 2,000 2,500
Fixed Overhead 3,000 3,500
Total Costs 45,000 51,000
If the original budget was flexed the overall cost variance would be:
a. P 6,000 adverse
b. P833 adverse
c. P 2,400 favorable
d. P 3,000 favorable

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