Budgeting

FINANCIAL
AND
OPERATING
BUDGET
Past collections experienced by Thor Company indicate 60% of
the net sales billed in a month are collected during the month of
sales, 30% are collected in the following month. And 10% are
collected in the second following month. A record of monthly net
sales of previous month is as follows:
On January 1, 2011, the net accounts receivable balance showed

P 250, 000.
REQUIRED: Determine the following:

•Cash collections on accounts receivable every
•Accounts receivable balance at the end of each month
November P350,00 March P440,000

2010 December P420,000 April P500,000
January P450,000 2011 May P550,000
2011 February P380,000 June P600,000
Russel Gil Corporation has the following budget estimates for its second year of
operations:
Projected sales P 3,500,000

Projected income before tax 12% of sales
Estimated selling and administrative expenses 25% of sales
Direct Labor and factory overhead are budgeted at 70% of the total manufacturing cost
Inventories are estimated as follows:
Raw Materials Goods in process Finished Goods
Beginning 220,000 250,000 350,000
Ending 270,000 300,000 420,000
1. The estimated cost of goods sold would be:

a. 2,275,000 c. 2,325,000
b. 2,205,000 d. 1,750,000
2. The estimated purchases of raw materials would be

a. 967,500 c. 697,500
b. 732,000 d. 747,500
ANSWERS: 1. B 2. D
Washington Company has the following 2012 budget data:
Beginning finished goods inventory 40,000

Direct Labor P 20 per unit
Sales 70,000
Variable Factory Overhead P 5 per unit
Ending finished goods inventory 30,000
Fixed Factory Overhead P 80,000
Direct Materials P 10 per unit
3. What are the 2012 total budgeted production costs?

a. P 2,100,000
b. P 2,180,000
c. P 2,240,000
d. P 2,320,000
B
Montana Company’s budget contains the following information:
Units
Beginning finished goods inventory 85
Beginning work-in-process in equivalent units 10
Desired ending finished goods inventory 100
Desired ending work-in-process in equivalent units 40
Projected sales 1,800
4. How many equivalent units should Montana plan to produce?

a. 1,565
b. 1,800
c. 1,815
d. 1,845
D
5. Josefina Company expects to manufacture and sell 30,000
baskets in 2012 for P 6 each. There are 3,000 baskets in
beginning finished goods inventory with target ending inventory
of 4,000 baskets. The company keeps no work in process
inventory.
What amount of sales revenue will be reported on the 2012

budgeted income statement?
a. P 174,000 c. P 186,000
b. P 180,000 d. P 204,000
A
6. A company’s product has an expected 4-year life cycle from research, development,
and design through its withdrawal from the market. Budgeted costs are:
Upstream costs (R&D, Design) P 2,000,000

Manufacturing costs 3,000,000
Downstream costs (marketing, Distribution and Customer Service) 1,200,000
After-purchase costs 1,000,000
The company plans to produce 200,000 units and price the product at 125% of the
whole life unit cost. Thus, the budgeted unit selling price is
a. P 15 c. P 36
b. P 31 d. P 45
D
7. Following is the sales budget of U2 Company for the period January to June 2013:
MONTHS UNITS
January 100,000
February 90,000
March 90,000
April 80,000
May 70,000
June 70,000
The company’s projection is to have inventory on hand at the end of each month
equal to 70% of the sales for the month following. It is assumed that the inventory at
the end of December 2013 will meet this requirement. It is also estimated that the
80,000 units will be sold in July 2013.
What is the total production budget in units for the six months period ending June 30,
2013?
a. 556,000 c. 524,000
b. 486,000 d. 479,000
B
8. Backstreet Girls Corporation plans to sell 200, 000 units of
product XEY in July and anticipated a growth 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 XEY or the quarter

ending September 30 would be
a. 670,560 c. 665,720
b. 691,525 d. 675,925
C
9. Colorado Company desires an ending inventory of P 60,000. It
expects sales of P 120,000 and has a beginning inventory of
P 40,000. Cost of sales is 60% of sales.
Budgeted purchases are

a. P 60,000
b. P 72,000
c. P 92,000
d. P 132,000
C
10. Nebraska Company, a merchandising firm, is preparing its master budget and has
gathered the following data to help budget cash disbursements:
Budgeted data:
Desired decrease in inventories 70,000
Cost of Goods Sold P 1,680,000
Desired decrease in accounts payable 150,000
All of the accounts payables are for inventory purchases and all inventories are
purchased on account. What are the estimated cash disbursements for inventories
for the budget period?
a. P 1,460,000
b. P 1,600,000
c. P 1,900,000
d. P 1,760,000
D
SEATWORK
1. The projected sales price for a new product (which is still
in the development stage of the product life cycle) is P50.
The company has estimated the life-cycle cost to be P30
and the first-year cost to be P60. On this type of product,
the company requires a P12 per unit profit. What is the
target cost of the new product?
a. P60 c. P38
b. P30 d. P43
2. The preparation of an organization's budget
a. forces management to look ahead and try to see

the future of the organization.
b. requires that the entire management team work

together to make and carry out the yearly plan.
c. makes performance review possible at all levels of

management.
d. all of the above choices.

3. Ivory Company has the following expected pattern of
collections on credit sales: 70 percent collected in the month of
sale, 15 percent in the month after the month of sale, and 14
percent in the second month after the month of sale. The
remaining 1 percent is never collected. At the end of May, Ivory
Company has the following accounts receivable balances:
From April sales P21,000
From May sales 48,000
Ivory's expected sales for June are P150,000. What were total
sales for April?
a. P150,000 c. P 70,000
b. P 72,414 d. P140,000
4. Bali Company has a policy of maintaining an inventory of
finished goods equal to 30 percent of the following month's
sales. For the forthcoming month of March, Bali has
budgeted the beginning inventory at 30,000 units and the
ending inventory at 33,000 units. This suggests that
a. February sales are budgeted at 10,000 units less than March

sales.
b. March sales are budgeted at 10,000 units less than April sales.
c. February sales are budgeted at 3,000 units less than March
sales.
d. March sales are budgeted at 3,000 units less than April sales.
5. Which of the following is not an advantage of budgeting?
a. It requires managers to state their objectives.

b. It facilitates control by permitting comparisons of budgeted
and actual results
c. It facilitates performance evaluation by permitting
comparisons of budgeted and actual results
d.It provides a check-up device that allows managers to keep
close tabs on their subordinates
6. Budgets are a necessary component of financial decision
making because they provide a
a. Efficient allocation of resources

b. Means to use all the firm’s resources
c. Means to check managerial discretion
d. Automatic corrective mechanism for errors
7. In an organization that plans by using comprehensive
budgeting, the master budget
a. A compilation of all the separate operational and

financial budget schedules of the organization
b. The booklet containing budget guidelines, policies and

forms to use in the budgeting process
c. The current budget updated for operations for part of the

current year
d. A budget for a non-profit entity after it is approved by the

appropriate authoritative body
8. Which of the following equations can be used to budget
purchases? (BI= Beginning inventory, EI= ending inventory
desired, COGS= Budgeted cost of goods sold)
a. Budgeted purchases= COGS + BI – EI

b. Budgeted purchases= COGS + BI
c. Budgeted purchases= COGS + EI + BI
d. Budgeted purchases= COGS + EI –BI
9. South Dakota Company budgets sales of 22,000 units for
January, 30,000 for February. The budgeted beginning
inventory for January 1 was 7,000 units. South Dakota
desires an ending inventory equal to one-half of the
following month’s sales needs. Budgeted production for
January is
a. 37,000 units
b. 30,000 units
c. 26,000 units
d. 14,000 units
10. New Mexico Company plans to sell 24,000 units of Product
A in July and 30,000 units in August. Sales of Product A during
June were 25,000 units. Past experience has shown that end-of
month inventory must equal 3,000 units plus 30% of the next
month’s sales. On June 30, this requirement was met. Based on
these data, how many units of Product A must be produced
during the month of July?
a. 28,800
b. 22,200
c. 24,000
d. 25,800
11. The cash receipts budget includes
a. Funded depreciation
b. Operating supplies
c. Extinguishment of debt
d. Loan proceeds
12. Which of the following schedules would be the last item to
be prepared in the normal budget preparation process?
a. Direct labor budget

b. Cost of goods sold budget
c. Cash budget
d. Manufacturing overhead budget
13. In the preparation of a cash budget with clear-cut
information on sources and uses of funds, all of the following
would classified as a cash flow under investing activities,
except:
a. Collection of a loan from subsidiary

b. Purchase of a patent from an inventor
c. Sale of plant assets
d. Dividends received on stock held as an investment
14. In the preparation of a cash budget with clear-cut
information on sources and uses of funds, all of the following
would classified as a cash flow under financing activities, except:
a. The conversion of the company’s own preferred stock into

common stock
b. The declaration and payment of a cash dividend on the
company’s own common stock
c. The repayment of principal on a mortgage
d. The sale of the company’s own preferred stock for cash
15. A flexible budget is
a. One that can be changed whenever a manager so desires

b. Adjusted to reflect expected costs at the actual level of
activity
c. One that uses the formula “total cost= cost per unit x units
produced”
d. The same as continuous budget
16. Which of the following is a difference between a static
budget and a flexible?
a. A flexible budget includes only variable costs; a static budget

includes only fixed costs
b. A flexible budget includes all costs; a static budget includes
only fixed costs
c. A flexible budget gives allowances for different levels of
activity while a static budget does not
d. None of the choices

Budgeting

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FINANCIAL

On January 1, 2011, the net accounts receivable balance showed

REQUIRED: Determine the following:

November P350,00 March P440,000

Projected sales P 3,500,000

1. The estimated cost of goods sold would be:

2. The estimated purchases of raw materials would be

Beginning finished goods inventory 40,000

3. What are the 2012 total budgeted production costs?

4. How many equivalent units should Montana plan to produce?

What amount of sales revenue will be reported on the 2012

Upstream costs (R&D, Design) P 2,000,000

The production requirement in units of XEY or the quarter

Budgeted purchases are

a. forces management to look ahead and try to see

b. requires that the entire management team work

c. makes performance review possible at all levels of

d. all of the above choices.

a. February sales are budgeted at 10,000 units less than March

a. It requires managers to state their objectives.

a. Efficient allocation of resources

a. A compilation of all the separate operational and

b. The booklet containing budget guidelines, policies and

c. The current budget updated for operations for part of the

d. A budget for a non-profit entity after it is approved by the

a. Budgeted purchases= COGS + BI – EI

a. Direct labor budget

a. Collection of a loan from subsidiary

a. The conversion of the company’s own preferred stock into

a. One that can be changed whenever a manager so desires

a. A flexible budget includes only variable costs; a static budget

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