chapter 15 - answer

MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 15

FUNCTIONAL AND ACTIVITY-BASED BUDGETING

I. Questions

1. No. Planning and control are different, although related, concepts. Planning involves developing objectives and formulating steps to achieve those objectives. Control, by contrast, involves the means by which management ensures that the objectives set down at the planning stage are attained.

2. Budgets have a dual purpose, for planning and for following up the implementation of the plan. The great benefits from budgeting lie in the quick investigation of deviations and in the subsequent corrective action. Budgets should not be prepared in the first place if they are ignored, buried in files, or improperly interpreted.

3. Two major features of a budgetary program are (1) the accounting techniques which developed it and (2) the human factors which administer it. The human factors are far more important. The success of a budgetary system depends upon its acceptance by the company members who are affected by the budget. Without a thoroughly educated and cooperative management group at all levels of responsibility, budgets are a drain on the funds of the business and are a hindrance instead of help to efficient operations.

4. Manufacturing overhead costs are budgeted at normal operating capacity, and the costs are applied to the products using a predetermined rate. The predetermined rate is computed by dividing a factor that can be identified with both the products and the overhead into the overhead budgeted at the normal operating capacity. Budgets may also be used in costing products in a standard cost accounting system.

5. The production division operates to produce the products that are sold. Production and sales must be coordinated. Products must be manufactured so that they will be available to meet sales delivery dates. Activity of the production division will depend upon the sales that can be made. Also, the sales division is limited by the capabilities of the

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Chapter 15 Functional and Activity-Based Budgeting

production department in manufacturing products. Successful operations depend upon a coordination of sales and production.

6. Labor hour required for production can be translated into labor pesos by multiplying the number of hours budgeted by the appropriate labor rates. The rates to be used will depend upon the rates established for job classifications and the policy with respect to premium pay for overtime or shift differences.

7. A long-range plan for the acquisition of plant assets is broken down and entered in the current budget as the plan unfolds. The portion of the plan which is to be executed in the next year is included in the budget for that year.

8. A budget period is not limited to any particular unit of time. At a minimum, a budget should cover at least one operating cycle. For example, a budget should not cover a period when purchasing activity is high and omit the period when sales volume and cash collection are relatively high. The budget period should encompass the entire cycle extending from the purchasing operation to the subsequent sale of the products and the realization of the sales in cash. Ordinarily, a budget of operations is prepared for a year which in turn is divided into quarters and months. Long-term budgets, such as budgets for projects or capital investments, may extend five to ten years or more into the future.

9. A rolling budget or a progressive budget or sometimes called continuous budget, is a budget which is prepared throughout the year. As one month elapses, a budget is prepared for one more month in the future. At any one time for example, the company will have a budget for one year into the future, when July of one year is over, a budget for the following July will be added at the other end of the budget. This process of adding a new month as a month expires is continuous.

10. Variances that are revealed by a comparison of actual results with a budget are investigated if it appears that an investigation is warranted. The investigation may show that stricter control measures are needed or that some weaknesses in the operation should be corrected. It may also reveal that the budget plan should be revised. The comparison is one step in the control and direction of business operations.

11. A comparison of actual results with a budget can contribute information that can be applied in the preparation of better budgets in the future. Subsequent investigation of variances provides management with a

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Functional and Activity-Based Budgeting Chapter 15

better knowledge of operations. This knowledge can be applied in the preparation of more realistic budgets for subsequent fiscal periods.

12. A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets, i.e., the budget is not imposed from above. The major advantages are: (1) the views and judgments of persons from all levels of an organization are represented in the final budget document; (2) budget estimates generally are more accurate and reliable, since they are prepared by those who are closest to the problems; (3) managers generally are more motivated to meet budgets which they have participated in setting; (4) self-imposed budgets reduce the amount of upward “blaming” resulting from inability to meet budget goals. One caution must be exercised in the use of self-imposed budgets. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack.

13. No, although this is clearly one of the purposes of the cash budget. The principal purpose is to provide information on probable cash needs during the budget period, so that bank loans and other sources of financing can be anticipated and arranged well in advance of the actual time of need.

14. Zero-based budgeting requires that managers start at zero levels every year and justify all costs as if all programs were being proposed for the first time. In traditional budgeting, by contrast, budget data are usually generated on an incremental basis, with last year’s budget being the starting point.

15. A budget is a detailed quantitative plan for the acquisition and use of financial and other resources over a given time period. Budgetary control involves the use of budgets to control the actual activities of a firm.

16. 1. Budgets communicate management’s plans throughout the organization.

2. Budgets force managers to think about and plan for the future.3. The budgeting process provides a means of allocating resources to

those parts of the organization where they can be used most effectively.

4. The budgeting process can uncover potential bottlenecks before they occur.

5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.

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6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

17. A master budget represents a summary of all of management’s plans and goals for the future, and outlines the way in which these plans are to be accomplished. The master budget is composed of a number of smaller, specific budgets encompassing sales, production, raw materials, direct labor, manufacturing overhead, selling and administrative expenses, and inventories. The master budget generally also contains a budgeted income statement, budgeted balance sheet, and cash budget.

18. The flow of budgeting information moves in two directions—upward and downward. The initial flow should be from the bottom of the organization upward. Each person having responsibility over revenues or costs should prepare the budget data against which his or her subsequent performance will be measured. As the budget data are communicated upward, higher-level managers should review the budgets for consistency with the overall goals of the organization and the plans of other units in the organization. Any issues should be resolved in discussions between the individuals who prepared the budgets and their managers.

All levels of an organization should participate in the budgeting process—not just top management or the accounting department. Generally, the lower levels will be more familiar with detailed, day-to-day operating data, and for this reason will have primary responsibility for developing the specifics in the budget. Top levels of management should have a better perspective concerning the company’s strategy.

19. Budgeting can assist a company forecast its workforce staffing needs through direct labor and other budgets. By careful planning through the budget process, a company can often smooth out its activities and avoid erratic hiring and laying off employees.

II. Matching Type

1. C 6. A2. H 7. B3. E 8. J4. F 9. D5. I 10. G

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III. Exercises

Exercises 1 (Schedule of Expected Cash Collections)

Requirement 1

July August September TotalMay sales:

P430,000 × 10% P 43,000 P 43,000June sales:

P540,000 × 70%, 10% 378,000 P54,000 432,000July sales:

P600,000 × 20%, 70%, 10% 120,000 420,000 P 60,000 600,000

August sales:P900,000 × 20%, 70% 180,000 630,000 810,000

September sales:P500,000 × 20% 100,000 100,000

Total cash collections P541,000 P654,000 P790,000 P1,985,000

Notice that even though sales peak in August, cash collections peak in September. This occurs because the bulk of the company’s customers pay in the month following sale. The lag in collections that this creates is even more pronounced in some companies. Indeed, it is not unusual for a company to have the least cash available in the months when sales are greatest.

Requirement 2

Accounts receivable at September 30:

From August sales: P900,000 × 10%....................................................................P 90,000From September sales: P500,000 × (70% + 10%)................................................. 400,000 Total accounts receivable.....................................................................................P490,000

Exercise 2 (Production Budget)

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July August September QuarterBudgeted sales in units 30,000 45,000 60,000 135,000Add desired ending inventory*

4,500 6,000 5,000 5,000 Total needs 34,500 51,000 65,000 140,000Less beginning inventory 3,000 4,500 6,000 3,000 Required production 31,500 46,500 59,000 137,000

* 10% of the following month’s sales

Exercise 3 (Materials Purchase Budget)

Quarter – Year 2 Year 3First Second Third Fourth First

Required production of calculators 60,000 90,000 150,000 100,000 80,000Number of chips per calculator × 3 × 3 × 3 × 3 × 3 Total production needs—chips 180,000 270,000 450,000 300,000 240,000

Year 2First Second Third Fourth Year

Production needs—chips 180,000 270,000 450,000 300,000 1,200,000Add desired ending inventory—

chips 54,000 90,000 60,000 48,000 48,000 Total needs—chips 234,000 360,000 510,000 348,000 1,248,000Less beginning inventory—chips

36,000 54,000 90,000 60,000 36,000 Required purchases—chips 198,000 306,000 420,000 288,000 1,212,000 Cost of purchases at P2 per chip

P396,000 P612,000 P840,000 P576,000 P2,424,000

Exercise 4 (Direct Labor Budget)

Requirement 1

Assuming that the direct labor workforce is adjusted each quarter, the direct labor budget would be:

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter Year

Units to be produced 5,000 4,400 4,500 4,900 18,800 Direct labor time per unit (hours)

× 0.40 × 0.40 × 0.40 × 0.40 × 0.40Total direct labor hours needed

2,000 1,760 1,800 1,960 7,520 Direct labor cost per hour × P11.00 × P11.00 × P11.00 × P11.00 × P11.00

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Total direct labor cost P 22,000 P 19,360 P 19,800 P 21,560 P 82,720

Requirement 2

Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages are paid, the direct labor budget would be:

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter Year

Units to be produced 5,000 4,400 4,500 4,900 18,800 Direct labor time per unit

(hours) × 0.40 × 0.40 × 0.40 × 0.40 × 0.40Total direct labor hours needed

2,000 1,760 1,800 1,960 7,520 Regular hours paid 1,800 1,800 1,800 1,800 7,200 Overtime hours paid 200 - - 160 360 Wages for regular hours

(@ P11.00 per hour) P19,800 P19,800 P19,800 P19,800 P79,200 Overtime wages

(@ P11.00 per hour × 1.5) 3,300 - - 2,640 5,940

Total direct labor cost P23,100 P19,800 P19,800 P22,440 P85,140

Exercise 5 (Manufacturing Overhead Budget)

Requirement 1

Kiko CorporationManufacturing Overhead Budget

1st

Quarter2nd

Quarter3rd

Quarter4th

Quarter YearBudgeted direct labor-hours 5,000 4,800 5,200 5,400 20,400 Variable overhead rate x P1.75 x P1.75 x P1.75 x P1.75 x P1.75 Variable manufacturing overhead P 8,750 P 8,400 P 9,100 P 9,450 P 35,700 Fixed manufacturing overhead 35,000 35,000 35,000 35,000 140,000 Total manufacturing overhead 43,750 43,400 44,100 44,450 175,700 Less depreciation 15,000 15,000 15,000 15,000 60,000 Cash disbursements for

manufacturing overhead P28,750 P28,400 P29,100 P29,450 P115,700

Requirement 2

Total budgeted manufacturing overhead for the year (a) P175,700 Total budgeted direct labor-hours for the year (b) 20,400 Predetermined overhead rate for the year (a) ÷ (b) P 8.61

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Exercise 6 (Selling and Administrative Budget)

Helene CompanySelling and Administrative Expense Budget

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter Year

Budgeted unit sales 12,000 14,000 11,000 10,000 47,000 Variable selling and

administrative expense per unit x P2.75 x P2.75 x P2.75 x P2.75 x P2.75

Variable expense P33,000 P 38,500 P 30,250 P 27,500 P129,250 Fixed selling and

administrative expenses:Advertising 12,000 12,000 12,000 12,000 48,000 Executive salaries 40,000 40,000 40,000 40,000 160,000 Insurance 6,000 6,000 12,000 Property taxes 6,000 6,000 Depreciation 16,000 16,000 16,000 16,000 64,000

Total fixed selling and administrative expenses 68,000 74,000 74,000 74,000 290,000

Total selling and administrative expenses 101,000 112,500 104,250 101,500 419,250

Less depreciation 16,000 16,000 16,000 16,000 64,000 Cash disbursements for selling

and administrative expensesP 85,000 P 96,500 P 88,250 P 85,500 P355,250

Exercise 7 (Cash Budget Analysis)

Quarter (000 omitted)1 2 3 4 Year

Cash balance, beginning P 9 * P 5 P 5 P 5 P 9Add collections from customers

76 90 125 * 100 391 *Total cash available 85 * 95 130 105 400 Less disbursements:

Purchase of inventory 40 * 58 * 36 32 * 166Operating expenses 36 42 * 54 * 48 180 *Equipment purchases 10 * 8 * 8 * 10 36 *Dividends 2 * 2 * 2 * 2 * 8

Total disbursements 88 110 * 100 92 390 Excess (deficiency) of cash

available over disbursements (3 )* (15 ) 30 * 13 10

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Financing:Borrowings 8 20 * — — 28Repayments (including

interest) 0 0 (25 ) (7 )* (32 )Total financing 8 20 (25 ) (7 ) (4 )Cash balance, ending P 5 P 5 P 5 P 6 P 6

*Given.

IV. Problems

Problem 1 (Schedule of Expected Cash Collections and Disbursements)

Requirement 1

September cash sales...........................................................................................P 7,400September collections on account:

July sales: P20,000 × 18%...............................................................................3,600August sales: P30,000 × 70%...........................................................................21,000September sales: P40,000 × 10%...................................................................... 4,000

Total cash collections...........................................................................................P36,000

Requirement 2

Payments to suppliers:August purchases (accounts payable)................................................................P16,000September purchases: P25,000 × 20%.............................................................. 5,000

Total cash payments.............................................................................................P21,000

Requirement 3

COOKIE PRODUCTSCash Budget

For the Month of September

Cash balance, September 1..................................................................................P 9,000Add cash receipts:

Collections from customers.............................................................................. 36,000 Total cash available before current financing........................................................45,000

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Less disbursements:Payments to suppliers for inventory.................................................................P21,000Selling and administrative expenses.................................................................9,000 *Equipment purchases.......................................................................................18,000Dividends paid................................................................................................. 3,000

Total disbursements............................................................................................. 51,000 Excess (deficiency) of cash available over

disbursements.................................................................................................. (6,000 )Financing:

Borrowings......................................................................................................11,000Repayments.....................................................................................................0Interest............................................................................................................. 0

Total financing..................................................................................................... 11,000Cash balance, September 30.................................................................................P 5,000

* P13,000 – P4,000 = P9,000.

Problem 2 (Production and Purchases Budget)

Requirement 1

Production budget:July August September October

Budgeted sales (units) 40,000 50,000 70,000 35,000Add desired ending inventory 20,000 26,000 15,500 11,000Total needs 60,000 76,000 85,500 46,000Less beginning inventory 17,000 20,000 26,000 15,500Required production 43,000 56,000 59,500 30,500

Requirement 2

During July and August the company is building inventories in anticipation of peak sales in September. Therefore, production exceeds sales during these months. In September and October inventories are being reduced in anticipation of a decrease in sales during the last months of the year. Therefore, production is less than sales during these months to cut back on inventory levels.

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Requirement 3

Raw materials purchases budget:

July AugustSeptembe

rThird

QuarterRequired production (units) 43,000 56,000 59,500 158,500Material P214 needed per unit × 3 lbs. × 3 lbs. × 3 lbs. × 3 lbs.Production needs (lbs.) 129,000 168,000 178,500 475,500Add desired ending inventory (lbs.) 84,000 89,250 45,750 * 45,750 Total Material P214 needs 213,000 257,250 224,250 521,250Less beginning inventory (lbs.) 64,500 84,000 89,250 64,500 Material P214 purchases (lbs.) 148,500 173,250 135,000 456,750

* 30,500 units (October production) × 3 lbs. per unit= 91,500 lbs.; 91,500 lbs. × 0.5 = 45,750 lbs.

As shown in requirement (1), production is greatest in September. However, as shown in the raw material purchases budget, the purchases of materials is greatest a month earlier because materials must be on hand to support the heavy production scheduled for September.

Problem 3 (Cash Budget; Income Statement; Balance Sheet)

Requirement 1

Schedule of cash receipts:

Cash sales—June.................................................................................................P 60,000Collections on accounts receivable:

May 31 balance................................................................................................72,000June (50% × 190,000)...................................................................................... 95,000

Total cash receipts...............................................................................................P227,000

Schedule of cash payments for purchases:

May 31 accounts payable balance........................................................................P 90,000June purchases (40% × 200,000).......................................................................... 80,000 Total cash payments.............................................................................................P170,000

PICTURE THIS, INC.Cash Budget

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For the Month of June

Cash balance, beginning......................................................................................P 8,000 Add receipts from customers (above)................................................................... 227,000 Total cash available.............................................................................................. 235,000 Less disbursements:

Purchase of inventory (above)..........................................................................170,000 Operating expenses..........................................................................................51,000 Purchases of equipment.................................................................................... 9,000

Total cash disbursements..................................................................................... 230,000 Excess of receipts over disbursements.................................................................. 5,000 Financing:

Borrowings—note............................................................................................18,000 Repayments—note...........................................................................................(15,000)Interest............................................................................................................. (500 )

Total financing..................................................................................................... 2,500 Cash balance, ending...........................................................................................P 7,500

Requirement 2

PICTURE THIS, INC.Budgeted Income Statement

For the Month of June

Sales....................................................................................................................P250,000Cost of goods sold:

Beginning inventory........................................................................................ P 30,000Add purchases................................................................................................. 200,000 Goods available for sale...................................................................................230,000Ending inventory............................................................................................. 40,000 Cost of goods sold........................................................................................... 190,000

Gross margin.......................................................................................................60,000Operating expenses (P51,000 + P2,000)............................................................... 53,000 Net operating income...........................................................................................7,000Interest expense................................................................................................... 500 Net income..........................................................................................................P 6,500 Requirement 3

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PICTURE THIS, INC.Budgeted Balance Sheet

June 30

AssetsCash....................................................................................................................P 7,500Accounts receivable (50% × 190,000)..................................................................95,000Inventory.............................................................................................................40,000Buildings and equipment, net of depreciation

(P500,000 + P9,000 – P2,000)......................................................................... 507,000 Total assets..........................................................................................................P649,500

Liabilities and EquityAccounts payable (60% × 200,000)......................................................................P120,000Note payable........................................................................................................18,000Share capital........................................................................................................420,000Retained earnings (P85,000 + P6,500)................................................................. 91,500 Total liabilities and equity....................................................................................P649,500

Problem 4 (Sales, Production and Materials Purchases Budget)

Requirement 1

Nikko Manufacturing CompanySales Budget

For the year ending December 31, 2005

Units AmountFirst quarter 16,000 P 480,000Second quarter 20,000 600,000Third quarter 22,000 660,000Fourth quarter 22,000 660,000

Total 80,000 P2,400,000

Requirement 2

Nikko Manufacturing CompanyStatement of Production Required

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For 2005

Q u a r t e r1st 2nd 3rd 4th Total

Units to be sold 16,000 20,000 22,000 22,000 80,000Add: Desired ending inventory (20%) 4,000 4,400 4,400 5,000 5,000

Total units required 20,000 24,400 26,400 27,000 85,000Less: Beginning inventory 3,000 4,000 4,400 4,400 3,000Units to be produced 17,000 20,400 22,000 22,600 82,000

Requirement 3

Nikko Manufacturing CompanyStatement of Raw Materials Purchase Requirements

For 2005

Q u a r t e r1st 2nd 3rd 4th Total

Units required for production 51,000 61,200 66,000 67,800 246,000Add: Desired ending inventory 12,240 13,200 13,560 15,000 15,000

Total units 63,240 74,400 79,560 82,800 261,000Less: Beginning inventory 12,500 12,240 13,200 13,560 12,500Raw Materials to be Purchased 50,740 62,160 66,360 69,240 248,500

Problem 5 (Schedule of Expected Cash Collections; Cash Budget)

Requirement 1

Schedule of expected cash collections:

MonthApril May June Quarter

From accounts receivable P141,000 P 7,200 P148,200From April sales:

20% × 200,000 40,000 40,00075% × 200,000 150,000 150,0004% × 200,000 P 8,000 8,000

From May sales:20% × 300,000 60,000 60,00075% × 300,000 225,000 225,000

From June sales:

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20% × 250,000 50,000 50,000 Total cash collections P181,000 P217,200 P283,000 P681,200

Requirement 2

Cash budget:

MonthApril May June Quarter

Cash balance, beginning P 26,000 P 27,000 P 20,200 P 26,000 Add receipts:

Collections from customers 181,000 217,200 283,000 681,200

Total available 207,000 244,200 303,200 707,200 Less disbursements:

Merchandise purchases108,000 120,000 180,000 408,000

Payroll 9,000 9,000 8,000 26,000 Lease payments 15,000 15,000 15,000 45,000 Advertising 70,000 80,000 60,000 210,000 Equipment purchases 8,000 — — 8,000

Total disbursements 210,000 224,000 263,000 697,000 Excess (deficiency) of

receipts over disbursements (3,000 ) 20,200 40,200 10,200

Financing:Borrowings 30,000 — — 30,000 Repayments — — (30,000) (30,000)Interest — — (1,200 ) (1,200 )

Total financing 30,000 — (31,200 ) (1,200 )Cash balance, ending P 27,000 P 20,200 P 9,000 P 9,000

Requirement 3

If the company needs a minimum cash balance of P20,000 to start each month, the loan cannot be repaid in full by June 30. If the loan is repaid in full, the cash balance will drop to only P9,000 on June 30, as shown above.

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Some portion of the loan balance will have to be carried over to July, at which time the cash inflow should be sufficient to complete repayment.

Problem 6 (Flexible Budget)

Summer Machine CompanyFlexible Overhead Budget

Department 1

Capacity100% 90% 80% 70% 60%

Machine Hours 200,000 180,000 160,000 140,000 120,000Variable Overhead P1,300,000 P1,170,000 P1,040,000 P 910,000 P 780,000Fixed Overhead 300,000 300,000 300,000 300,000 300,000

Total P1,600,000 P1,470,000 P1,340,000 P1,210,000 P1,080,000

Manufacturing Overhead rate per machine hour P8.00

Summer Machine CompanyFlexible Overhead Budget

Department 2

Capacity100% 90% 80% 70% 60%

Direct Labor Hours 200,000 180,000 160,000 140,000 120,000Machine Hours 400,000 360,000 320,000 280,000 240,000Variable Overhead P1,400,000 P1,260,000 P1,120,000 P 980,000 P 840,000Fixed Overhead 500,000 500,000 500,000 500,000 500,000

Total P1,900,000 P1,760,000 P1,620,000 P1,480,000 P1,340,000

Manufacturing Overhead rate per machine hour P4.75

Problem 7 (Cash Budget with Supporting Schedules)

1. Collections on sales: July August Sept. QuarterCash sales...................................................P 8,000 P14,000 P10,000 P 32,000

Credit sales:

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May: P30,000 × 80% × 20%....................4,800 4,800

June: P36,000 × 80% × 70%,

20%.....................................................20,160 5,760 25,920

July: P40,000 × 80% × 10%,

70%, 20%............................................3,200 22,400 6,400 32,000

Aug.: P70,000 × 80% × 10%,

70%..................................................... 5,600 39,200 44,800

Sept.: P50,000 × 80% × 10%................... 4,000 4,000

Total cash collections...................................P36,160 P47,760 P59,600 P143,520

2. a. Merchandise purchases budget:

July August Sept. Oct.Budgeted cost of goods sold........................P24,000 P42,000 P30,000 P27,000

Add desired ending inventory*.................... 31,500 22,500 20,250

Total needs..................................................55,500 64,500 50,250

Less beginning inventory............................. 18,000 31,500 22,500

Required inventory purchases......................P37,500 P33,000 P27,750

*75% of the next month’s budgeted cost of goods sold.

b. Schedule of expected cash disbursements for merchandise purchases:

July August Sept. QuarterAccounts payable, June 30..........................P11,700 P11,700

July purchases.............................................18,750 P18,750 37,500

August purchases........................................ 16,500 P16,500 33,000

September purchases................................... 13,875 13,875

Total cash disbursements.............................P30,450 P35,250 P30,375 P96,075

3. Ju Products, Inc.

Cash Budget

For the Quarter Ended September 30

July August Sept. QuarterCash balance, beginning...........................P 8,000 P 8,410 P 8,020 P 8,000

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Add collections from sales........................ 36,160 47,760 59,600 143,520

Total cash available.............................. 44,160 56,170 67,620 151,520

Less disbursements:

For inventory purchases........................30,450 35,250 30,375 96,075

For selling expenses.............................7,200 11,700 8,500 27,400

For administrative expenses..................3,600 5,200 4,100 12,900

For land................................................4,500 0 0 4,500

For dividends....................................... 0 0 1,000 1,000

Total disbursements.................................. 45,750 52,150 43,975 141,875

Excess (deficiency) of cash

available over disbursements................ (1,590 ) 4,020 23,645 9,645

Financing:

Borrowings...........................................10,000 4,000 14,000

Repayment...........................................0 0 (14,000) (14,000)

Interest................................................. 0 0 (380 ) (380 )

Total financing......................................... 10,000 4,000 (14,380) (380 )

Cash balance, ending................................P 8,410 P 8,020 P 9,265 P 9,265

* P10,000 × 1% × 3 = P300

P4,000 × 1% × 2 = 80

P380

V. Multiple Choice Questions

1. B 11. C 21. C2. B 12. B 22. C3. C 13. C 23. D4. E 14. B 24. C5. C 15. D 25. C6. C 16. C 26. C

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7. D 17. A 27. D8. C 18. B 28. A9. A 19. E 29. C10. D 20. B 30. D

Supporting computations:

Questions 16 to 20:

January FebruaryCost of sales P1,400,000 P1,640,000Add: Desired Minimum Inventory 492,000 456,000

Total 1,892,000 2,096,000Less: Beginning Inventory (1,400,000 x 0.3)(17) 420,000 492,000

Gross Purchases (16) 1,472,000 1,604,000Less: Cash discount 14,720 16,040Net cost of purchases P1,457,280 P1,587,960

Payments of Purchases60% - month of purchase P874,368 P 952,77640% - following month 582,912

T o t a l (18) P1,535,688

(19)

Gross

February Cash

Discount NetCurrent month’s sales (with

discount) 35% P595,000 P11,900 P583,100Current month’s sales (without

discount) 15% 255,000 0 255,000

Previous month’s sales (with discount) 4.5% 67,500 1,350 66,150

Previous month’s sales (without discount) 40.5% 607,500 607,500

P1,525,000 P13,250 P1,511,750

(20)Total Collections in February P1,511,750Add: Cash sales 350,000

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T o t a l P1,861,750

(21)Estimated cash receiptsCollections from customers P1,350,000Proceeds from issuance of common stock 500,000Proceeds from short-term borrowing 100,000

Total P1,950,000Less: Estimated cash disbursements

For cost and expenses P1,200,000For income taxes 90,000Purchase of fixed asset 400,000Payment on short-term borrowings 50,000

Total 1,740,000Cash balance, Dec. 31 P 210,000

(22)Net income P120,000Add: Depreciation 65,000Working capital provided from operations P185,000Add: Increase in income taxes payable P 80,000

Increase in provision for doubtfulaccounts receivable 45,000 125,000

T o t a l P310,000Less: Increase in accounts receivable P 35,000

Decrease in accounts payable 25,000 60,000Increase in cash P250,000

(23)Cash Receipts for February 2005From February sales (60% x 110,000) P 66,000From January sales 38,000

T o t a l P104,000

(24)Pro-forma Income Statement, February 2005Sales P110,000Cost of sales (75%) 82,500Gross profit P 27,500

Less: Operating expenses 16,500Depreciation 5,000Bad debts 2,200 23,700

Net operating income P 3,800

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(25)Accounts Payable on February 28, 2005 will be the unpaid purchases in February - (75% x P120,000) = P90,000.

Questions 26 to 29:

Net sales P2,000,000Less: Cost of sales

Finished goods inventory, Jan. 1 P 350,000Add: Cost of goods manufactured (Sch. I) 1,350,000 *

Total available for sale P1,700,000Less: Finished goods inventory, Dec. 31 400,000 1,300,000 (26)Gross Profit P 700,000Less: Operating and financial expenses

Selling P 300,000Administrative 180,000Finance 20,000 500,000

Net income before taxes P 200,000

* Determined by working back from net income to sales.

Schedule I

Raw materials usedRaw materials inventory, Jan. 1 P 250,000Add: Purchases 491,000 (29)

Total available 741,000Less: Raw materials inventory, Dec. 31 300,000

Raw materials used P 441,000Direct labor 588,000Manufacturing overhead 441,000 (28)

Total Manufacturing Cost P1,470,000 (27)Add: Work-in-process inventory, Jan. 1 200,000

Total P1,670,000Less: Work-in-process inventory, Dec. 31 320,000Cost of goods manufactured P1,350,000

(30)Variable factory overhead

P3.125

15-21

P150,00048,000


Fixed factory overhead

5.000

Total factory overhead P8.125

15-22

P240,00048,000