Problem Set

Problem 1
Queriones Company is in the process of preparing its operating budget for 2023. The
company produces and sells only one product “Toblerone”.

A. Sales and Collections. The product is currently sold at a unit price of P250. The
following estimates are developed by the Market Research Department as probable
sales in January 2023:
Unit Sales Probability
40,000 30
50,000 50
60,000 20

Sales in the succeeding months are expected to increase by 10% from each month
thereafter, except for the month of April which is expected to increase by 20% from the
immediately preceding month.

Eighty percent (80%) of sales are to be made on credit with terms of 2/10, n/30. Billings
are made on the date of sales and collections are made as follows:
40% in the month of sales with 55% paying within the discount period
50% in the first month after sale
5% in the second month after sale
5% uncollectibles

The accounts receivable balance on December 31, 2022 is P4,000,000 with 75% of it
coming from the December 2022 sales.

B. Production. The finished goods inventory at the end of each month is set at 80% of
the next month’s sales.

C. Materials. A unit of product Toblerone needs 4 lbs. of material Y costing P5 per

pound. Materials inventory at the end of each month is estimated to be 20% of the next
month’s needs plus 20,000 lbs. Payments to materials suppliers are: 60% in the month
of purchase and 40% in the following month of purchase. The accounts payable
balance in December 31, 2022 is P600,000.

D. Labor. It takes 2 hours to produce a unit of product Toblerone. On the average,

production workers are paid at a rate of P40 per hour. Payroll costs amounting to 20%
of the total payroll cost per month are estimated to be paid in the next month.
E. Factory overhead. The standard variable factory overhead rate is P5 per hour. Total
budgeted fixed overhead is set at P6 million to be incurred evenly during the year. The
company’s normal capacity is 50,000 units per month.

Required:
Budgeted operating and financial data for the months of January, February, and March
2023.
a. Sales in units and in pesos, net of allowance for doubtful accounts and discounts.

2. The Sales Department of Cayaban Company has been in the business of selling toy
batteries which has a total market of 20,000,000 last 2022. It served 20% of the total
market last year and in the coming year. It expects the following total market based on
various economic forecasts as follows:
 Estimated total market
Economy Probability Rechargeable Non-rechargeable
Excellent
Excellent 50% 100,000 30,000,000
Good 40% 78,000 23,000,000
Fair 10% 54,000 17,000,000

It targets to serve at least 25% of the total market in rechargeable battery and 34% in
non-rechargeable battery. It plans to sell the rechargeable battery at P80 each and the
non-rechargeable battery at P6 each. What are the estimated sales in pesos for 2023?

Multiple Choice

1. The first step involved in preparing a master budget is

a. Preparing a forecasted income statement.
b. Preparing a general operating budget.
c. Preparing a forecasted statement of financial position.
d. Preparing detailed period budgets.

2. The second logical step in preparing a master budget would be to:

a. Estimate the cost of goods sold.
b. Forecast sales during the budget period.
c. Establish the basic goals and long-range plans for the company.
d. Forecast general and administrative expenses for the budget period.

3. Which of the following components of the master budget must be prepared before the
others?
a. Direct labor peso budget
b. Cost of goods sold forecast
c. Production budget
d. Raw materials purchase budget

4. Which of the following factors are not important to consider in making a sales
forecast?
a. Past sales volume d. Plant capacity
b. Distribution costs involved e. None of the above.
c. Conditions within the industry

5. The period budget should begin with a forecast of

a. overhead. c. sales.
b. production. d. direct labor

6. The basic difference between a master budget and a flexible budget is:
a. Flexible budget considers only variable costs but a master budget considers all costs.
b. Flexible budget allows management latitude in meeting goals whereas a master
budget is based on a fixed standard.
c. Master budget is based on one specific level of production and a flexible budget can
be prepared for any production level within a relevant range.
d. Master budget is for an entire production facility but a flexible budget is applicable to
a single department only.

7. A flexible budget is
a. Appropriate for control of factory overhead but not for control of direct materials and
direct labor. Flexible budget allows management latitude in meeting goals whereas a
master budget is based on a fixed standard.
b. Appropriate for control of direct materials and direct labor but not for control of factory
overhead.
c. Not appropriate when costs and expenses are affected by the fluctuations in volume
limits.
d. Appropriate for any level of activity.

8. The purpose of a flexible budget is to

a. Allow management some latitude in meeting goals.
b. Eliminate cyclical fluctuations in production reports by ignoring variable costs.
c. Compare actual and budgeted results at virtually any level of production.
d. Reduce the total time in preparing the annual budget.

9. When using a flexible budget, what will occur to fixed costs (on a per unit basis) as
production increased within the relevant range?
a. Fixed costs per unit will decrease.
b. Fixed costs per unit will remain unchanged.
c. Fixed costs per unit will increase.
d. Fixed costs are not considered in flexible budgeting.

10. A budget that identifies revenues and costs with an controlling their incurrence is:
a. Budgetary control. d. Responsibility budget.
b. Master budget. e. None of the above.
c. Product budget.

11. In preparing quarterly budget estimates, who should be responsible for the cash
budget?
a. Sales manager c. Finance manager
b. Production manager d. General manager

12. The cash budget is prepared

a. Before all period budgets are prepared.
b. After all forecasted income statement but before the forecasted statement of financial
position.
c. As the last step in the master budget.
d. Only if the company has doubts about the debt-paying ability.

13. The calculation of reasonable probabilities about the future, based on the analysis of
all the latest relevant information by tested and logically sound statistical and
econometric techniques, and applied in terms of an executive's personal judgment and
knowledge of his business is:
a. Budgeting. d. Project feasibility studies.
b. Planning and control. e. None of the above.
c. Business forecasting.

14. Zero-based budgeting (ZBB) is a

a. Budget system which measures actual or estimated results, in terms of benefit
accruing to the public and their unit cost.
b. Process which requires systematic consideration of all programs, projects and
activities with the use of defined ranking procedures; the activities analyzed and
presented in decision packages.
c. Undertaking that comprises all the functions and activities devoted to the
accomplishment of a major purpose for which government entity is established.
d. Line-item budgeting justified from a base of P1,000.
e. Budget system based on a no appropriation or zero limit of funds.

15. The following information pertains to questions 16 through 20: The Dilly Company
marks up all merchandise at 25% of gross purchase. All purchases are made on
account with terms of 1/10, net/60. Purchase discounts which are recorded as
miscellaneous income, are always taken. Normally, 60% of each month's purchases are
paid for in the month of purchase while the other 40% are paid during the first 10 days
of the first month after purchase. Inventories of merchandise at the end of each month
are kept at 30% of the next month's projected cost of goods sold.

Terms for sales on account are 2/10, net/30. Cash sales are not subject to discount.
Fifty percent of each month's sales on account are collected during the month of sale,
45% are collected in the succeeding month and the remainder are usually uncollectible.
Seventy percent of the collections in the month of sale are subject to discount while
10% of the collections in the succeeding month are subject to discount.

Projected sales data for selected months follow:

Sales on Account Gross Cash Sales

December P 1,900,000 P 400,000
January 1,500,000 250,000
February 1,700,000 350,000
March 1,600,000 300,000

16. Projected gross purchases for January are

a. P1,400,000. d. P1,248,000
b. P1,470,000. e. None of the above
c. P1,472,000.

17. Projected inventory at the end of December is

a. P420,000. d. P552,000.
b. P441,600 e. None of the above.
c. P393,750.

18. Projected payments to suppliers during February are

a. P1,551,200. d. P1,509,552.
b. P1,535,688. e. None of the above.
c. P1,528,560.

19. Projected sales discounts to be taken by customers making remittances during

February are
a. P 5,250. d. 11,900
b. P15,925. e. None of the above
c. P30,000.

20. Projected total collections from customers during February are

a. P1,875,000. d. P1,188,100
b. P1,861,750. e. None of the above
c. P1,511,750.

21. Davis Corporation expects the following transactions in 20X3. Their first year of
operations:

Sales (90% collectible in 20X3)…………………………………… P 1,500,000

Bad debt write-offs…………………………………………………. 60,000
Disbursements of costs and expenses…………………………… 1,200,000
Disbursements for income taxes…………………………………. 90,000
Purchases of fixed assets......……………………………………….. 400,000
Proceeds from issuance of ordinary shares.................................... 580,000
Proceeds from short-term borrowings……………………………….. 100,000
Payments on short-term borrowings. ……………………………….. 50,000
Depreciation on fixed assets…………………………………………. 80,000

What is the cash balance at December 31, 20X3?

a. P150,000 c. P210,000
b. P170,000 d. P280,000

22. David Company has budgeted its activity for April 20X3. Selected data from
estimated amounts are as follows:

Net income P120,000

Increase in gross amount of trade accounts receivable during month 35,000
Decrease in accounts payable during month 25,000
Depreciation expense 65,000
Provision for income taxes 80,000
Provision for doubtful accounts receivable 45,000

On the basis of the above data, David has budgeted a cash increase for the month in
the amount of
a. P 90,000. c. P250,000.
b. P195,000. d. P300,000.

Items 23 through 25 are based on the following data:

The January 31, 20X3 statement of financial position of Shelpat Corporation follows:

Cash P 8,000
Accounts receivable (net of allowance for uncollectible accounts of P2,000 ) 38,000
Inventory 16,000
Property, plant and equipment (net of allowance for accumulated depreciation
ofP60,000) 40,000
P120,000

Accounts payable 82,000

Ordinary shares 50,000
Retained earnings (deficit) (30,500)
P120,000

Additional information:
 Sales are budgeted as follows:
February P120,000
March 35,000
 Collections are expected to be 60% in the month of sale, 38% the next month,
and 2% uncollectible.
 The gross margin is 25% of sales. Purchases each month are 75% of the next
month's projected sales. The purchases are paid in full the following month.
 Other expenses for each month, paid in cash, are expected to be P16,500.
Depreciation each month is P5,000.

23. What are the budgeted cash collections for February 20X3?
a. P 63,800 c. P101,800
b. P 66,000 d. P104,000

24. What is the pro-forma income (loss) before income taxes for February 20X3?
a. P(3,700) c. P3,800
b. P(1,500) d. P6,000

25. What is the projected balance in accounts payable on February 20X3?

a. P 82,500 c. P 90,000
b. P 86,250 d. P106,500

26. Reliance Company budgets sales at P2,000,000 and expects a net income before
tax of 10% of the sales.

Expenses are estimated as follows:

Selling 15% of sales
Administrative 9% of sales
Finance 1% of sales

Labor is expected to be 40% of the total manufacturing overhead is to be applied at

75% of direct labor cost.
Inventories are to be as follows:
January 1 December 31
Materials 250,000 300,000
Work in process 200,000 320,000
Finished goods 350,000 400,000

Cost of goods sold will be:

a. P 500,000. d. P2,000,000.
b. P 700,000. e. None of the above.
c. P1,300,000.

27. Refer to Question No. 26. Total manufacturing cost will be:
a. P 741,000. d. P1,470,000.
b. P 882,000. e. None of the above.
c. P1,029,000.

28. Refer to Question No. 26. Factory overhead will amount to:
a. P 441,000. d. P1,029,000.
b.P491,000. e. None of the above.
c. P 588,000.

29. Refer to Question No. 26. Materials purchases will be:

a. P250,000. d. P741,000.
b. P300,000. e. None of the above.
c. P491,000.

30. Dean Company is preparing a flexible budget for 20X3 and the following maximum
capacity estimates for department M are available:
At Maximum Capacity
Direct labor hours 60,000
Variable factory overhead P150,000
Fixed factory overhead P240,000

Assume that Dean's normal capacity is 80% of maximum capacity. What would be the
total factory overhead rate, based on direct-labor hours, in flexible budget at normal
capacity?
a. P6.00 c. P7.50
b. P6.50 d. P8.13