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MANAGEMENT 9
LESSON 5 -OPERATING & FINANCIAL BUDGETING
Review Problems
MULTIPLE CHOICE

1. ABC Co. budgeted merchandise purchases of 40,000 units next month. The expected beginning
inventory is 12,000 units and the desired inventory at the end of next month is 15,000 units. Budgeted
sales in units for next month is
a. 37,000 b. 43,000 c. 55,000 d. 52,000

2. CDE, Inc. will start its commercial operations on January 1, 2020. The sales forecast per the sales
manager’s estimates for its first year of operations is 50,000 units. However, the production manager
estimated that only 80% of the sales forecast can be produced with the available workforce and
equipment. The product will be sold for P20 per unit. The budgeted peso sales for CDE, Inc.’s initial
year of operations is
a. P800,000 b. P1,000,000 c. P50,000 d. P40,000

3. Light Corporation produces push-button switches used in the manufacture of electric fans. For the year
2020, the sales of electric fans has been forecasted at 800,000 units. Each unit of electric fans requires
4 pieces of push-button switches. Light Corp. regularly supplies 60% of the push-button switches
used in the production of new electric fans.
In addition, a replacement parts market also exists. Over the past 5 years, the sales of the
replacement push-button switches have increased per year by 20% of the preceding year’s sales. In
2019, Light Corp sold 150,000 pieces of push-button replacement switches. The trend is expected to
continue in 2020.
The company sells the push-button switches for P10 per piece in both markets.

The budgeted sales revenue based on the expected number of pieces of push-button switches to be
sold in 2020 is
a. P19,2000.000 b. P20,700,000 c. P21,000,000 d. P2,100,000

4. SHE Company has budgeted sales of 90,000 units in January; 120,000 units in February; and 180,000
units in March. The company has 20,000 units on hand on January 1. If SHE Company requires an
ending inventory of finished goods equal to 20% of the following month’s sales, the budgeted
production during February should be
a. 96,000 b. 108,000 c. 120,000 d. 132,000

5. STL Company has budgeted sales of 90,000 units in January; 120,000 units in February; and 180,000
March. The company has 20,000 units of finished goods and 35,000 pieces of materials on hand on
January 1. Each unit of product requires 5 pieces of materials. The desired inventory of finished goods
and materials at the end of each month is as follows:
Finished goods – 20% of next month’s sales
Materials - 25% of next month’s production needs
How many pieces of materials should the company plan to purchase in January?
a. 600,000 b. 567,000 c. 468,000 d. 552,500

ITEMS 6 AND 7 ARE BASED ON THE FOLLOWING INFORMATIONS:

CCW Corporation has the following budgeted production for four months:
April 50,000
May 40,000
June 45,000
July 60,000
Each unit of product requires 2 pieces of raw materials. The desired ending raw materials inventory for
each month is 130% of the following month’s production needs, plus 2,000 pieces. (The April 1 inventory
meets this requirement.)
The product is processed in two departments (Dept. A and Dept. B) and the direct labor standards are as
follows:
Hours per Unit Rate per Hour Labor Cost per Unit
Department A 6 P30 P180
Department B 2 40 80
6. What is the budgeted purchases of raw materials in June?
a. 51,000 b. 84,000 c. 120,000 d. 129,000
7 What is the budgeted direct labor cost for the month of May?
a. P13,000,000 b. P11,700,000 c. P10,400,000 d. P7,200,000

8. FMC Company has the following budget formula for factory overhead costs:
FOH = P5,000,000 per month + P300 per unit of product
If the company plans to produce 50,000 units in January, how much is the budgeted factory overhead
cost?
a. P20,000,000 b. P15,000,000 c. P5,000,000 d. P5,050,300
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9. BGY Corporation’s budget includes the following data:
Budgeted sales 7,200
Inventories: Beginning Ending
Finished goods 300 400
Work-in-process in equivalent units 60 160

How many equivalent units should BGY Corporation plan to produce during the budget period?
a. 7,300 b. 7,400 c. 7,000 d. 7,200

10. ADC, Inc. manufactures a talking doll which has the following production cost data for each unit of doll:
Materials: Voice box assembly purchased from an
Outside source P100
Other materials 400
Labor – 8 hours at P30 per hour 240
Variable factory overhead (8 hours @ P20 per hour) 160
Total variable cost per doll 900
Fixed factory overhead – P10,000,000 per month

Budgeted sales of dolls for the 3 months of the year are as follows:
October 30,000
November 40,000
December 70,000
As much as possible, the company does not want to stock finished goods inventory, so it produces exactly the
same quantity as the budgeted sales each month. However, in order to avoid stock-out problems in December, it
plans to have a December 1 inventory balance of 30% of December’s budgeted sales. What is the budgeted
production cost in November?
a. P54,900,000 b. P56,800,000 c. P46,000,000 d. P64,900,000

ITEMS 11 TO 14 ARE BASED ON THE FOLLOWING INFORMATION:

Samsonite Inc. manufactures leather bags with 3 zipper-type pockets. The company outsources the zippers at P8
per unit. Each bag requires 5 direct labor hours to produce at a rate of P10 per hour. Budgeted sales of bags for the
first quarter of the year and the first month of the following quarter are as follows:
January 900 units
February 1,000 units
March 1,500 units
April 1,800 units

Inventory data are as follows:

January 1: Leather bags 360
Zipper 1,620
End of each month:
Leather bags – 40% of the following month’s budgeted sales
Zipper – 60% of the following month’s production requirement

11. What is the budgeted production of leather bags for the first quarter?
a. 3,760 b. 3,040 c. 4,400 d. 3,400

12. What is the budgeted purchases of zipper for February?

a. 2,844 b. 1,956 c. 4,356 d. 3,600

13. What is the total budgeted zipper and labor costs for the month of March?
a. P55,080 b. P29,160 c. P122,472 d. P119,880

14. assume that on the average, a full-time factory worker works 188 hours per month and no overtime is allowed,
how many full-time equivalent factory workers are needed to produce the budgeted output of leather
bags in January?
a. 5 b. 25 c. 100 d. 23.94

ITEMS 15 TO 16 ARE BASED ON THE FOLLOWING INFORMATION:

CDA Company prepared the following figures for its only product as a basis for its 2021 budget:
Budgeted sales 240,000 units
Selling price P5
Required materials per unit of product 2 pieces
Materials beginning inventory 20,000 pieces
Materials ending inventory 24,000 pieces
Purchase price per piece of material P3
Finished goods beginning inventory 15,000 units
Finished goods ending inventory 18,000 units
Direct labors hours, per 1,000 units of product 60 hours
Direct labor rate per hour P30
Variable factory overhead rate per hour P10
Fixed factory overhead P300,000
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15. The budgeted peso amount of materials purchases is

a. P1,458,000 b. P2,450,000 c. P1,470,000 d. P741,000
16. The total budgeted manufacturing cost for 2021 is
a. P2,341,200 b. P884,658 c. P2,041,200 d. P2,353,200

ITEMS 17 AND 18 ARE BASED ON THE FOLLOWING INFORMATION:

Global Inc. operates a retail computer store in Sta. Mesa, Manila. The result of its operations for the year 2020 is
summarized below:
Sales: Hardware P5,400,000
Software 2,250,000
Services 1,350,000
Total sales P9,000,000

Cost and expenses: Cost of hardware sold P3,780,000

Cost of software sold 1,350,000
Selling expenses 680,000
Service costs 720,000
Administrative costs 1,260,000
Total costs and expenses P7,790,000
Operating income P1,210,000

The budget for 2021 was based on the operating results in 2020 and on the following assumptions:
 The selling price of hardware will increase by an average of 20%. There will be no change in the selling
prices of software and services.
 Unit sales are expected to increase as follows:
Hardware – 5%
Software – 8%
Service – 10%
 The costs of hardware and software are expected to increase by 6% while the cost of service, which is
purely fixed cost, will go up by P140,000.
 Selling costs will increase by 4%.
 Administrative costs will remain the same.

17. The budgeted sales for 2021 is

a. P10,395,000 b. P10,899,000 c. P10,719,000 d. P10,914,750

18. The budgeted total costs and expenses for 2021 is

a. P8,579,820 b. P8,265,000 c. P8,615,820 d. P7,790,000

ITEMS 19 TO 22 ARE BASED ON THE FOLLOWING INFORMATION:

TOY Company produces and sells toy ships. For the month of May, it expects to sell 20,100 units of its passenger
ship model LX at P600 each. Each unit of LX requires three component parts as follows:

Component Part Code Units required per LX Purchase Price

Body BO 1 P30
Motor assembly MA 1 60
Body accessories BA 10 20

The variable conversion cost for each of LX amounts to P170. Fixed factory overhead per unit is P50, based on the
company’s normal monthly capacity of 25,000 units of LX
TOY uses the standard absorption costing method for valuing inventories. Beginning and ending inventories for the
month of May are as follows:
May 1 May 31
Units: LX 600 500
BO 1,050 450
MA 1,600 600
BA 7,000 3,000

19. The budgeted production of LX for the month of May is

a. 20,100 b. 20,000 c. 20,600 d. 20,200

20. The total budgeted cost of all purchased components for the month of May is
a. P234,400 b. P25,784,000 c. P2,200,000 d. P5,642,000

21. The book value of the desired May 31 inventories is

a. P364,500 b. P370,750 c. P109,500 d. P255,000

22. TOY’s budgeted gross margin from LX for the month of May is
a. P12,060,000 b. P1,860,00 c. P1,809,000 d. P1,559,000
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23. Clear Co. produces and sells two types of deodorants: the Roll-on Type and Spray Type. For the month of
May, budgeted sales are:
Roll-on 5,000 boxes @ P500 per box
Spray 8,000 boxes @ P600 per box

The deodorants are sold through sales agents who receive sales commissions provided they meet their sales
quota for the month. The rates of commission and sales quota are as follows:
Rate of Commission paid Sales Quota
On total sales
Roll-on 5% P2,000,000
Spray 6% 5,000,000
The sales commission that should be budgeted for the month of May is
a. P100,000 b. P125,000 c. P25,000 d. P400,000

24. RDO Co.. uses a continuous or rolling budget. The month of March is about to end, so the company is now
preparing estimates for April. Figures for the period January to March pertaining to factory supplies are as
follows:
Production Factory Supplies
January 90,000 P144,612
February 108,000 170,712
March 96,000 153,312
If the budgeted production for April is 94,000 units, how much should the budgeted factory supplies
be?
a. P150,412 b. P130,500 c. P136,300 d. P151,040

25. GHI Corporation sells ball pens. For the month of June, its master budget shows the following:
Sales (300,000 units) P4,500,000
Variables costs:
Materials P1,500,000
Labor 600,000
Factory overhead 900,000
Selling/administrative 300,000 3,300,000
Contribution margin P1,200,000
Fixed costs:
Factory overhead P600,000
Selling/administrative 200,000 800,000
Operating income P 400,000
During June, actual sales was 350,00 units of ball pen. The expected operating income based on a flexible
budget at the sales level of 350,000 units is
a. P400,000 b. P200,000 c. P600,000 d. P466,667

ITEMS 26 AND 27 ARE BASED ON THE FOLLOWING INFORMATION:

GRM Corporation has the following budget estimated for the year 2021:
Sales P2,800,000
Income before tax 10% of sales
Selling and administrative expenses 25% of sales
Conversion cost 70% of total manufacturing cost

Inventories are budgeted as follows:

Beginning Ending
Materials P176,000 P216,000
Work-in-process 200,000 240,000
Finished goods 280,000 336,000

26. The budgeted cost of goods sold is

a. P1,764,000 b. P1,820,000 c. P1,860,000 d. P1,400,000
27. The budgeted purchases of raw materials is
a. P614,800 b. P574,800 c. P534,800 d. P1,916,000

28. MBC Corporation has the following sales budget for the second quarter of 2021:
April P 988,000
May 1,248,000
June 1,664,000
Other budget estimates are as follows:
 Merchandise is to be sold at its invoice cost plus 30% markup.
 Beginning inventory of each month is to be 40% of that month’s projected cost of goods sold.

The budgeted merchandise purchases for the month of May is

a. P990,080 b. P1,088,000 c P960,000 d. P832,000
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ITEMS 29 TO 31. ARE BASED ON THE FOLLOWING INFORMATION:

PMG Corporation is preparing its factory overhead cost budget for the third quarter of 2021. The management
plans to produce 200,000 units for the said quarter. Past experience has shown that the company’s product is
produced at the rate of 4 units per hour. Variable rates per direct labor hour are as follows:
Indirect materials and supplies P0.76
Power 1.36
Repairs and maintenance 2.80
Other variable overhead 0.96
Total P5.88

Total fixed overhead cost is budgeted at P147,200. For product costing purposes, a fixed factory overhead rate of
P3.20 per direct labor hour has been established.

29. How much is the total budgeted factory overhead for the quarter?
a. P417,680 b. P454,000 c. P441,200 d. P294,000
30. The total factory overhead cost per unit of product is
a. P1.47 b. P11.35 c. P36.32 d. P2.27
31. How much is the expected capacity variance?
a. P12,800 unfavorable b. P12,800 favorable c. P11,776 unfavorable d. P11,776 favorable

ITEMS 32 TO 36 ARE BASED ON THE FOLLOWING INFORMATION:

The following information was gathered by the Budget Committee Chairman of TMG Corporation:

TMG Corporation produces and sells only one product. The selling price during the budget period is expected to be
the prevailing price of P7.50 per unit. The company expects to sell 112,500 units of the product during the period.
The desired finished goods inventory at the end of the period is 75,000 units, while the expected beginning
inventory is 62,500 units.

Direct labor is P4.50 per hour. Each product requires 30 minutes to complete.

Factory overhead is applied to production on the basis of direct labor hour. Variable factory overhead cost at the
planned level of operations is budgeted at P49,800; fixed budgeted overhead is budgeted at P149,400.

Each unit of product requires 1.5 kgs. of raw materials. Only one kind of raw material is used and it is expected to
cost P0.30 per kilo. The desired ending inventory of raw materials is 12,000 kgs.; the expected beginning inventory
is 9,500 kilograms.

Variable selling and administrative costs will amount to P1.50 per unit of product sold.

32. The budgeted production is

a. 112,500 b. 125,000 c. 100,000 d. 187,500

33. The budgeted materials purchases for the period is

a. P56,250 b. P190,000 c. P57,000 d. P55,500

34. The budgeted direct labor cost is

a. P1,125,000 b. P16,875,00 c. P562,500 d.
P281,250

35. The budgeted cost of goods sold on an absorption costing basis is

a. P483,030 b. P536,700 c. P173,220 d. P483,705

36. The budgeted income before tax is

a. P360,720 b. P843,750 c. P173,220 d. P191,970