Exercises – Financial Planning and Budgets

1. Master Budget Preparation (Manufacturing): The balance sheet of the company as of January 1,
2021 (beginning of the budget period) showed the following balances:

Current Assets Liabilities and Equity

Cash P70,000 Common Stock P100,000
Finished Goods Inventory 21,600 Retained Earnings 276,000
Raw Material Inventory 8,000

Noncurrent Assets
Fixed Assets 276,400
Total Assets P376,000 Total Liabilities and Equity P376,000

Plano Corporation is planning to sell on credit and purchase on credit (for the first time) and decided to
prepare its master budget for the upcoming calendar year 2021. As a starting point, the controller together
with its finance officers gathered the sales department to come up with a realistic sales forecast Based
on their discussion, the targeted selling price for the upcoming period is P20 and the company plans to
sell 20,000 units, 25,000 units, 15,000 units, and 30,000 units for the first, second, third, and fourth
quarters, respectively. After the meeting with the sales department, the controller, then, discussed the
planned volume of production and manufacturing cost budget for the upcoming calendar year with the
production department. Their meeting showed the following:

a. The company currently has 2,000 units of inventory on hand. To prevent any stockouts, the
production department set that ending inventory for the first, second, third, and fourth quarter should
be 3,500; 1,800; 2,000; and 1,700 units, respectively.

Required: Prepare the production budget

b. Each finished unit requires 3 units of raw material. The company currently has 4,000 units of raw
materials on hand and adopts a policy of maintaining raw materials inventory (end) of at least 10 per
cent of next month’s production needs. Expected ending inventory of raw material for the fourth
quarter is 7,900 units. Each unit of raw materials cost P2.

Required: Prepare the DM budget

c. Each finished product requires 2 hours of direct labor at a rate of P1.50/hour.

Required: Prepare the DL budget

d. Variable manufacturing overhead cost is P0.30 per direct labor hour while fixed manufacturing
overhead is P26,910 per quarter.

Required: Prepare the MOH Budget

e. Subsequent to the meeting with the production department, the controller had a meeting with the
marketing and administrative department and noted that variable selling expense per unit is P0.40,
variable administrative expense per unit is P0.30; while fixed selling and administrative is expected
to be P20,000 per quarter.

Required: Prepare the S&A Budget

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Exercises – Financial Planning and Budgets

(Continuation) After a series of meetings with the production and sales department, the controller
performed analysis of the company’s cash requirements. The results of the analyses are as follows:

a. Sales are collected 20% in the quarter of sale, 60% in the next quarter and 15% two quarters
after the sale (remaining 5% is uncollectible). Purchases are paid 20% in the quarter of purchase,
60% in the next quarter and 20% paid two quarters after the purchase.
b. Selling and administrative expenses, direct labor and overhead are all cash expenses (except for
P6,910 depreciation per quarter included in fixed manufacturing overhead cost).
c. Short term financing bears interest of 10% per annum.
d. Beginning balance of cash is P70,000 and minimum cash balance is at P10,000.

Required: Prepare the cash receipts, disbursements, and cash budget

2. Cash Receipts Budget: Florence, Inc., found that about 10 percent of its sales during the month were for
cash. Lawrence has the following accounts receivable payment experience:

Percent paid in the month of sale 30%

Percent paid in the month after the sale 60%
Percent paid in the second month after the sale 7%

Florence’s anticipated sales for the next few months are

April P200,000
May 240,000
June 230,000
July 246,000
August 250,000

REQUIRED: Prepare a cash receipts budget for July and August.

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Exercises – Financial Planning and Budgets

Multiple Choice Questions

1. Budgets are a necessary component of financial decision making because they provide a (n)
a. Efficient allocation of resources
b. Means to check managerial discretion
c. Means to use all the firm’s resources
d. Automatic corrective mechanism for errors

2. The sales budget is classified as

a. A financial budget c. A flexible budget
b. An operating budget d. A program budget

3. In an organization that plans by using comprehensive budgeting, the master budget is

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

4. Using the concept of ‘expected value’ in sales forecasting means that the sales forecast to be used is
a. Developed using the indicator method.
b. The sum of the sales expected by individual
c. Based on expected selling prices of the products
d. Based on probabilities

5. The cash budget for 2021 would be affected in some way by all of the following, except
a. A cash dividend declared in 2020 for payment in 2021.
b. A cash dividend declared in 2021 for payment in 2022.
c. Interest expense on loans taken out and repaid during 2021.
d. The sales forecast for the first month in 2022.

6. The cash budget should help to ensure

a. That enough cash is on hand at all times to satisfy maximum cash requirements
b. Sufficient liquidity without an excess amount of idle cash
c. That cash dividends can be paid every quarter
d. That sufficient cash is available to pay salaries, even if it means borrowing the money

7. A company has prepared a cash budget for January through June of 2021. Which of the following,
discovered in February 2021, is LEAST likely to require revising the cash budget?
a. February sales are lower than budgeted.
b. The interest rate on short-term borrowing is higher than budgeted.
c. The company increased from 10% to 20% the down payment it requires from customers.
d. The company changed inventory methods from LIFO to FIFO.

8. Nebraska Company, a merchandising firm, is preparing its master budget and has gathered the following
data to help budget cash disbursements:
Cost of goods sold P 1,680,000
Desired decrease in inventories 70,000
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 c. P 1,600,000
b. P 1,900,000 d. P 1,760,000

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Exercises – Financial Planning and Budgets

9. Operational budgets are used for planning and controlling its business activities. Data regarding a
company’s sales for the last 6 months of the year and its projected collection patterns are shown below:

Forecasted sales
July P 775,000
August 750,000
September 825,000
October 800,000
November 850,000
December 900,000

Types of sales
Cash sales 20%
Credit sales 80%

Collection Pattern for Credit Sales

In the month of sale 40%
In the first month following the sale 57%
Uncollectible 3%

The cost of merchandise averages 40% of its selling price. The company’s policy is to maintain an
inventory equal to 25% of the next month’s forecasted sales. The inventory balance at cost is P 80,000
as of June 30.

The budgeted cost of the company’s purchases for the month of August would be
a. P 302,500 c. P 305,000
b. P 307,500 d. P 318,750

10. Using the information in no. 9, The company’s total cash receipts from sales and collections on account
that would be budgeted for the month of September would be
a. P 757,500 c. P 771,000
b. P 793,800 d. P 856,500

11. The Pennsylvania Company is preparing its cash budget for the month of May. The following information
is available concerning its accounts receivable:
Estimated credit sales for May P 200,000
Actual credit sales for April 150,000
Estimated collections in May for credit sales in May 20%
Estimated collections in May for credit sales in April 70%
Estimated collections in May for credit sales prior to April P 12,000
Estimated write-offs in May for uncollectible credit sales 8,000
Estimated provision for bad debts in May for credit sales in May 7,000

What are the estimated cash receipts from accounts receivable collections in May?
a. P 142,000 c. P 149,000
b. P 150,000 d. P 157,000

12. The information contained in a cost of goods manufactured budget most directly relates to the
a. Materials used, direct labor, overhead applied, and ending work-in-process
b. Materials used, direct labor, overhead applied, and work-in-process inventories budgets
c. Materials used, direct labor, overhead applied, and work-in-process inventories, and finished
goods inventories budgets
d. Materials used, direct labor, overhead applied, and finished goods inventories budgets

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Exercises – Financial Planning and Budgets

13. The cash receipts budget includes

a. Funded depreciation b. Operating supplies
c. Extinguishment of debt d. Loan proceeds

14. In the budgeting process, top management

a. Should only be involved in the approval process
b. Needs to be involved, including using the budget process to communicate goals
c. Lacks the detailed knowledge of the daily operations and should limit their involvement
d. Need to separate the budgeting process and business planning process into two separate processes

15. In a typical planning process, which of the following would be completed last?
a. Vision and mission c. Strategic objectives
b. Tactical goals d. Operational plans

16. Tropical Manufacturing Corporation is using the following flexible-budget formula for annual indirect labor
cost:
Total Cost = P12,000 + P0.75 per machine hour

For the month of June, the operating budgets are based upon 10,000 hours of planned machine time.
Indirect labor costs included in this planning budget are:
a. P7,500 c. P17,500
b. P8,500 d. P19,500

17. For better management acceptance, the flow of data to be used for budgeting should begin with
a. Accounting department c. Lower levels of management
b. Top management d. Budget committee

18. An advantage of incremental budgeting when compared with zero-based budgeting is that incremental
budgeting
a. Encourages adopting new projects quickly
b. Accepts the existing base as being satisfactory
c. Eliminates functions and duties that have outlived their usefulness
d. Eliminates the need to review all functions periodically to obtain optimum use of resources

19. The use of the master budget throughout the year as a constant comparison with actual results signifies
that the master budget is also a
a. Flexible budget
b. Capital budget, having Net Present Value Method as the main technique
c. Static budget
d. Zero-based budget

20. Which of the following may be considered an independent item in the preparation of the master budget?
a. Ending Inventory Budget
b. Pro forma income statement
c. Capital investment budget
d. Pro forma statement of financial position

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