STRATEGIC COST MANAGEMENT

MASTER BUDGET

1. Prism Design, Inc. sells a variety of porcelain products including porcelain sinks. In December 31,
the company had 1,000 sinks in inventory. The company’s policy is to maintain a sink inventory
equal to 5% of next month’s sales. The company expects the following sales activity for the first
quarter of the year as: January: 15,000 sinks; February: 20,000 sinks; March: 23,000 sinks.
What is the projected production for February?
a. 21,150 b. 19,850 c. 20,150 d. 22,150

2. The payment schedule of purchases made on account is: 60% during the month of purchase, 30%
in the following month, and 10% in the subsequent month. Total credit purchases were P200,000
in May, and P100,000 in June. Total payments on credit purchases were P140,000 in June. What
were the credit purchases in the month of April?
a. P200,000 b. P100,000 c. P145,000 d. P215,000

3. The El Espanol Company had the following budgeted sales for the first half of the current year:

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Cash Sales Credit Sales Cash Sales Credit Sales
Jan P 70,000 P 340,000 Apr P 35,000 P 120,000

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Feb 50,000 190,000 May 45,000 160,000
Mar 40,000 135,000 Jun 40,000 140,000

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The company is in the process of preparing a cash budget and must determine the expected cash
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collections by month. To this end, the following information has been assembled: Collections on
sales: 60% in the month of sale; 30% in the month following sale; 10% in the second month
following sale. The accounts receivable balance on January 1 of the current year was P70,000, of
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which P50,000 represents uncollected December sales and P20,000 represents uncollected
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November sales.
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The total cash collected by El Espanol Company during the month of January would be:
a. P410,000 b. P254,000 c. P344,000 d. P331,500
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4. Ironman Company is preparing its cash budget for the month ending November 30. The following
information pertains to Ironman’s past collection experience from its credit sales:
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Current month’s sales 12% Credit sales:

Prior month’s sales 75% November-estimated P 2,000,000
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Sales prior to current month 6% October 1,800,000

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Sales three months prior to current month 4% September 1,600,000

Cash discounts (2/30, net/90) 2% August 1,900,000
Doubtful accounts 1%

How much is the estimated credit to Accounts Receivable as a result of collections expected during
November?
a. P1,730,200 b. P1,757,200 c. P1,762,000 d. P1,802,000

5. Budgetary slack occurs when

a. Costs and sales are estimated too high. c. Costs are estimated too low but sales
are estimated too high.

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b. Costs are estimated too high but sales are estimated too low. d. Costs and sales are estimated
too low.

6. An overly optimistic sales budget may result in

a. increases in selling prices late in the year. c. increased sales during the year.
b. insufficient inventories. d. excessive inventories.

7. Nemesis, Inc. uses flexible budgeting for cost control. During the month of September, Nemesis,
Inc. produced 14,500 units of finished goods with indirect labor costs of P25,375. Its annual
master budget reflects an indirect labor costs, a variable cost, of P360,000 based on an annual
production of 200,000 units. In the preparation of performance analysis for the month of
September, how much flexible budget should be allowed for indirect labor costs?
a. P30,000 b. P29,167 c. P25,375 d. P26,100

8. Japan Company typically pays 40% of its purchases on account in the month of purchase and 60%
in the month following the purchase.
Purchases on Account Cash Purchases

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February 2012 P 10,000 P 5,000
March 2012 15,000 20,000

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April 2012 4,000 8,000

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Given the direct material projections, what would be the expected cash payments for March 2012?
a. P35,000 rs e
b. P32,000 c. P30,000 d. P20,000
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9. Michael Cage Manufacturing Company sells birdhouses. The company has prepared the following
forecast for the third quarter of 2012:
July 5,000 units
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August 6,000 units

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September 10,000 units

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Inventory of finished goods in June 30, 2012 is budgeted at 1,000 units. Management would like
the desired quantity of finished goods inventory at the end of each month to equal 20 percent of
next month’s budgeted sales. October’s projected sales are 12,000 units.
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Each completed unit of finished product requires 3 square feet of cedar at a cost of P15 per square
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foot.
The company has determined that it needs 10 percent of next month’s raw material needs on hand
at the end of each month.
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The cost of the direct material that should be purchased in August is:
a. P329,400 b. P306,000 c. P214,800 d. P322,200

Use the following information to answer questions 10 through 15:

Budgeted sales: January, P100,000; February, P200,000

Collections for sales: 60% in the month of sale; 40% one month after the month of sale

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Gross profit rate based on sales: 30%
Administrative costs: P10,000 per month
Beginning accounts receivable: P20,000
Beginning inventory: P14,000
Beginning trade accounts payable: P60,000.
Purchases are paid in full the following month.
Desired ending inventory is 20% of next month’s COGS.

10. For January, the amount of budgeted collections is

a. P 20,000 c. P 80,000
b. 60,000 d. none of the above

11. At the end of January, budgeted accounts receivable is

a. P 20,000 c. P 60,000
b. 40,000 d. none of the above

12. For January, budgeted COGS is

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a. P 20,000 c. P 40,000
b. 30,000 d. 70,000

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13. For January, budgeted net income is

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a. P 20,000 c. P 40,000
b. 30,000 rs e d. none of the above
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14. For January, the amount of budgeted cash payments is
a. P 14,000 c. P 60,000
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b. 70,000 d. none of the above

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15. At the end of January, budgeted ending inventory is

a. P 20,000 c. P 40,000
b. 28,000 d. none of the above
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TEST YOURSELF

PROBLEM A

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The following information has been gathered by the Budget Director of the Kareton Company, another
outfit managed by the Masugid Company. The firm manufactures and sells only one product. The selling
price during the coming month is expected to be the prevailing price of P5 per unit. Expected sales
during the month is a total of 75,000 units of finished goods. Finished goods expected to be on hand at
the end of the month total 50,000 units. Finished goods expected to be on hand at the beginning of he
month total 42,000 units.

Direct labor cost is P3.00 per hour. One-fourth an hour of direct labor is required to manufacture each
unit of finished product.
Factory overhead is applied to work-in-process on the basis of direct labor hours. Variable factory
expenses at the planned level of operations is expected to amount to P33,200; fixed overhead is expected
to amount to P99,600.

The raw materials expected to be on hand at the beginning of the month total 5,000 gallons. Only one
kind of raw material is used to produce the finished goods. One and one-half gallons of raw material are
needed to manufacture each unit of finished product. Raw materials are expected to cost P0.18 per gallon
during the coming month, its prevailing cost. Raw materials expected to be on hand at the end of the

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month total 8,000 gallons.

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Variable administrative and selling expenses is P1.00 per unit.
In assisting the company to formulate the budget, you determined the following budget parameters.

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Budgeted cost of raw materials to be used in production is
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2. Budgeted raw materials purchases cost is
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3. Budgeted direct labor is

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4. Variable overhead cost per direct labor hour is

5. Fixed overhead cost per direct labor hour is

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6. Budgeted contribution margin is

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7. Budgeted cost of goods sold (full cost) is

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8. Net profit before tax is

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PROBLEM B
For purposes of preparing the cash projections and other budget estimates for the third quarter of 2020,
the following information is presented to you by the management of Virgo Corporation:

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Second Quarter Sales Data: Pesos Units
April P 530,000 10,600
May 550,000 11,000
June 570,000 11,400

Projected sales for the next four months Pesos Units

July 540,000 10,800
August 550,000 11,000
September 560,000 11,200
October 580,000 11,600
All sales are on charge basis and billed at the end of the month. A 5% discount is given on collections
within the 15 days from billing date. Sales collections are generally made as follows:
70% within the month following the billing date with 40% of this being collected within the discount
period.
27% on the second month following the billing date.
3% considered uncollectible
Merchandise purchases are generally paid as follows:

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50% within the month they are incurred.
50% after the month they are incurred

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Ending inventory in units (cost per unit is P40) is 30% higher than the following month’s sales in units.
Operating expenses are on cash basis and are estimated to be 15% of the current month’s sales including

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monthly depreciation of P10,000.
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As of June 30, 2020, Accounts Receivable balance was P630,000 and Merchandise Inventory was
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P565,000.

9. The budgeted cash collections for the month of July would be

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10.The budgeted cash payments of the month of September would be

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11.The projected net income for September would be

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12.The balance of accounts receivable at the end of July, assuming that no uncollectible accounts
are written off for July would be (VD)
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