Part IV – The Master Budget Exercises

Discussion Questions:

1. Define the term budget. How are budgets used in planning?

2. Define control. How are budgets used to control?
3. What is a master budget? An operating budget? A financial budget?
4. All budgets depend on the sales budget. Is this true? Explain.
5. Why is it important for a manager to receive frequent feedback on his or her performance?
6. A budget too easily achieved will lead to diminished performance. Do you agree? Explain.

Exercises:

1. Preparing a Sales Budget

Patrick Inc. sells industrial solvents in five-gallon drums. Patrick expects the following units to be
sold in the first three months of the coming year.
January 41,000
February 38,000
March 50,000

The average price for a drum is P35.

Required: Prepare a sales budget for the first three months of the coming year, showing units and sales
revenue by month and in total for the quarter.

2. Preparing a Production Budget

Patrick Inc. makes industrial solvents. In the first four mounts of the coming year, Patrick expects
the following unit sales:
January 41,000
February 38,000
March 50,000
April 51,000

Patrick’s policy is to have a 25% of next month’s sales in ending inventory. On January 1, it is expected
that there will be 6,700 drums of solvent on hand.

Required: Prepare a production budget for the first quarter of the year. Show the number of drums that
should be produced each month as well as for the quarter in total.

3. Preparing a Direct Materials Purchases Budget

Patrick Inc. makes industrial solvent sold in five-gallon drums. Planned production in units for the
first three months of the coming year is:
January 43,800
February 41,000
March 50,250

Each drum requires 5.5 gallons of chemicals and one plastic drum. Company policy requires that
ending inventories of raw materials for each month be 15% of the next month’s production needs. That
policy was met for the ending inventory of December in the prior year. The cost of one gallon of chemicals
is P2.00. The cost of one drum is P1.60. (Note: Round all unit amounts to the nearest unit.
 Required:

a. Calculate the ending inventory of chemicals in gallons for December of the prior year, and for
January and February. What is the beginning inventory of chemicals for January?
b. Prepare a direct materials purchases budgets for chemicals for the months of January and
February.
c. Calculate the ending inventory of drums for December of the prior year, and for January and
February.
d. Prepare a direct materials purchases budgets for drums for the months of January and
February.
4. Preparing a Direct Labor Budget

Patrick Inc. makes industrial solvents. Planned production in units for the first three months of the
coming year is:

January 43,800
February 41,000
March 50,250

Each drum of industrial solvent takes 0.3 direct labor hours. The average wage is P18 per hour.

Required: Prepare a direct labor budget for the months of January, February, and March, as well as
the total for the first quarter.

5. Preparing an Overhead Budget

Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first three months of the
coming year are:
January 13,140
February 12,300
March 15,075

The variable overhead rate is P0.70 per direct labor hour. Fixed overhead is budgeted at P2,750 per month.

Required: Prepare an overhead budget for the months of January, February, and March, as well as the total
for the first quarter. (Note: Round all dollar amounts to the nearest dollar.)

6. Preparing an Ending Finished Goods Inventory Budget.

Andrew Company manufactures a line of office chairs. Each chair takes P14 of direct materials
and uses 1.9 direct labor hours at P16 per direct labor hour. The variable overhead rate is P1.20 per direct
labor hour and the fixed overhead rate is P1.60 per direct labor hour. Andrews expects to have 675 chairs in
ending inventory. There is no beginning inventory of office chairs.

Required:

a. Calculate the unit product cost. (Note: Round to the nearest cent.)
b. Calculate the cost of budgeted ending inventory. (Note: Round to the nearest dollar.)

7. Preparing a Cost of Goods Sold Budget

Andrews Company manufactures a line of office chairs. Each chair takes P14 of direct materials
and uses 1.9 direct labor hours at P16 per direct labor hour. The variable overhead rate is P1.20 per direct
labor hour and the fixed overhead rate is P1.60 per direct labor hour. Andrews expects to produce 20,000
 chairs next year an dexpects to have 675 chare in ending inventory. There is no beginning inventory of
office chairs. Prepare a cost of goods sold budget for Andrews Company.
8. Preparing a Selling and Administrative Expenses Budget

Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of
P19,730,000. There is a 3% commission on sales. In addition, fixed expenses of the sales and
administrative offices include the following:

Salaries P960,000
Utilities 365,000
Office space 230,000
Advertising 1,200,000

Required: Prepare a budgeted income statement for Oliver Company for the coming year. (Note: Round all
income statement amounts to the nearest dollar).

9. Preparing a Budgeted Income Statement

Oliver Company provided the following information for the coming year:

Units produced and sold 160,000

Cost of goods sold per unit P 6.30
Selling price P 10.80
Variable S&A expenses per unit P 1.10
Fixed S&A expenses P423,000
Tax rate 35%
Required: Prepare a budgeted income statement for Oliver Company for the coming year. (Note: Round all
income statement amounts to the nearest dollar.)

10. Preparing a schedule of Cash Collections on Accounts

Kailua and Company is a legal services firm. All sales of legal services are billed to the client
(there are no cash sales). Kailua expects that, on average, 20% will be paid in the month of billing, 50%
will be paid in the month following billing, and 25% will be paid in the second month following billing. For
the next five months, the following sales billings are expected:

May P84,000
June 100,800
July 77,000
August 86,800
September 91,000

Required: Prepare a schedule showing the cash expected in payments on accounts receivable in August and
in September.

11. Preparing an Accounts Payable Schedule

Wight Inc. purchases raw materials on account for use in production. The direct materials
purchases budget shows the following expected purchase on account:

April P374,400
May 411,200
June 416,000
 Wight typically pays 20% on account in the month of billing and 80% the next month.

Required:

a. How much cash is required for payment on account in May?

b. How much cash is expected for payments on account in June?

12. La Famiglia Pizzeria provided the following information for the month of October:

a. Sales are budgeted, to be P157,000. About 85% of sales are cash; the remainder are on account.
b. La Famiglia expects that, on average, 70% of credit sales will be paid in the month of sale, and 28 will
be paid in the following month.
c. Food and supplies purchases, all on account, are expected to be P116,000. La Famiglia pays 25% in
the month of purchase and 75% in the month following purchase.
d. Most of the work is done by the owners, who typically withdraw P6,000 a month from the business as
their salary. (Note: The P6,000 is a payment in total to the two owners, not per person

13. Select Operational Budgets

Joven Products produces coat racks. The projected sales for the first quarter of the coming year
and the beginning and ending inventory data are as follows:

Unit Sales 100,000

Unit Price P 15
Units in beginning inventory 8,000
Units in targeted ending inventory 12,000

The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs
P2.50 per pound. The beginning inventory of materials is 4,000 pounds. Joven Products wants to have
6,000 pounds of metal in inventory at the end of the quarter. Each rack produced requires 30 minutes of
direct labor time, which is billed at P9 per hour.

Required:

a. Prepare a sales budget for the first quarter.

b. Prepare a production budget for the first quarter
c. Prepare a direct materials purchases budget for the first quarter.
d. Prepare a direct labor budget for the first quarter.
14. Cash Budgeting

Kylles Inc. expects to receive cash from sales of P45,000 in March. In addition, Kylles expects to
sell property worth P3,500. Payments for materials and supplies are expected to total P10,000, direct labor
payroll will be P12,500, and other expenditures are budgeted at P14,900. On March 1, the cash account
balance is P1,230.

Required:

a. Prepare a cash budget for Kylles Inc. for the month of March.
b. Assume that Kylles Inc. wanted a minimum cash balance of P15,000 and that it could borrow
from the bank in multiples of P1,000 at an interest rate of 12% per year. What would the
adjusted ending balance for March be for Kylles? How much interest would Kylles owe in
April, assuming that the entire amount borrowed in March would be paid back?