PROBLEM SET

MASTER BUDGET

Problem 1 (Direct Materials Purchase Budget and Direct Labor Budget)

Manning Company produces variety of labels, including iron-on name labels, which are sold to parents of
camp-bound children. (The camps are requires campers to have their name on every article of clothing.)
Each roll consists of 10 yards of paper strip with 500 copies of the child’s name. Each yard of paper strip
costs P2.00. Manning has budgeted production of the label rolls for the next four months as follows:

Rolls in units
March 6, 000
April 9, 000
May 15, 000
June 10, 000

Inventory policy requires that sufficient paper strip be in ending monthly inventory to satisfy 25 percent of
the month’s production needs. The inventory of the paper strip at the beginning of March equals exactly
the amount needed to satisfy the inventory policy.

Requirements:
1. Prepare a direct materials purchase budget for March April and May showing purchases in units and in
pesos for each month and in total.
2. Each roll of labels produced requires (on average) 0.05 direct labor hours. The average cost of direct
labor is P60 per hour. Prepare a direct labor budget for March, April, May showing the hours needed and
the direct labor cost for each month and in total.

Problem 2 (Manufacturing Overhead Budget)

The production budget of a corporation for the upcoming fiscal year is as follows:

1Q 2Q 3Q 4Q
Budgeted Production in units 2, 000 2, 050 2, 125 1, 950

Each unit requires four (4) hours of direct labor. The company’s variable manufacturing overhead rate is
P5.00 per direct labor hour and the company’s fixed manufacturing overhead is P50, 000 per quarter. The
only non-cash item included in fixed manufacturing overhead is depreciation, which is P20, 000 per
quarter.

Required:
1. Construct the company’s manufacturing overhead budget for the upcoming fiscal year.
2. Compute the company’s manufacturing overhead rate ( including the both variable and fixed
manufacturing overhead) for the upcoming fiscal year. Round of to the nearest whole cent.

Problem 3 (Budgeted Income Statement)

I/S Inc., a one –product mail order firm, buys its product for P75 per unit and sells it for P140 per unit. The
sales staff receives a 10% commission on the sale of each unit. Its March income statement follows:

I/S Inc.
Income Statement
For Month Ended March 31, 2016

Sales P1, 400, 000

Cost of Goods Sold 750, 000
Gross Profit 650, 000
Expenses:
Sales Commissions 140, 000
Advertising 215, 000
Store Rent 26, 000
Administrative Salaries 42, 000
Depreciation 52, 000
Other Expenses 13, 000
Total Expenses P488, 000
Net Income P162, 000

Management expects March’s results to be repeated in April, May, and June of 2016 without any changes
in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a
rate of 10% each month for the next three months if the item’s selling price is reduced to P130 per unit
and advertising expenses are increased by 20% and remain at that level for all three months. The cost of
its product will remain at P75 per unit, the sales staff will continue to earn 10% commission, and the
remaining expenses will stay the same.
Required:
Prepare budgeted income statements for each of the months of April, May, and June that show the
expected results from implementing the proposed changes. Use a three-column format, with one column
for each month.

Problem 4 (Budgeted Balance Sheet)

Problem 5 (Expected Cash Receipts Budget)

Problem 6 (Cash Budget)

Problem 7 (Cash Budget)

Problem 8 (Financial Budget)

Prepared by:

Abdul Rahim G. Acoon, CPA

Financial Controllership Instructor