SAINT COLUMBAN COLLEGE

College of Business Education

ACCTG 202 – STRATEGIC COST MANAGEMENT

SHORT-TERM BUDGETING

LECTURE EXERCISE
1. Sales Budget
Fairy Tail Corporation made the following projections on its sales in the coming year, 2016:
Projected Units Sold
Economy Quarter 1 Quarter 2 Quarter 3 Quarter 4 Probability
Good 74,000 92,000 80,000 102,000 50%
Fair 50,000 80,000 70,000 90,000 30%
Bad 40,000 50,000 45,000 60,000 20%
The unit sales price is expected to be constant at P20.
Required: Prepare Schedule for Budgeted Sales in units and in pesos per quarter and for the year 2016.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016
Good (projected sales x ___%)
Fair (projected sales x ___%)
Bad (projected sales x ___%)
Budgeted Sales in Units
x Unit Sales Price
Budgeted Sales in Pesos

2. Production Budget & Materials Budget

Fairy Tail Corporation has the budgeted unit sales of its product in 2016 up to the first quarter of 2017 as
follows:
2016 1st Quarter ________
2nd Quarter ________
3rd Quarter ________
4th Quarter ________
2017 1st Quarter 75,000
The company has a policy of maintaining finished goods inventory equal to 20% of the next quarter’s sales and
materials inventory of 30% of current quarter’s requirements. It takes 3 lbs. of materials AX-23 to produce unit of
product. The materials inventory at the start of the year was recorded at 75,000 lbs. Material AX-23 costs P1.20 per
pound to purchase.
Required: 1. Prepare Schedule for Budgeted Production per quarter and for the year 2016.
2. Prepare Schedule for Budgeted Materials Usage per quarter and for the year 2016.
3. Prepare Schedule for Budgeted Materials Purchases per quarter and for the year 2016.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Budgeted Sales in Units
+ Finished Goods, End
Total Needs
- Finished Goods, Beg.
Budgeted Production

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Budgeted Production
x Standard Materials per Unit
Budgeted Materials Usage (in lbs.)
x Cost per lb.
Budgeted Materials Cost

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Budgeted Materials Usage (in lbs.)
+ Materials Inventory, End
Total Materials Needs
- Materials Inventory, Beg
Budgeted Materials Purchases (in lbs.)
x Cost per lb.
Budgeted Materials Purchases in Pesos

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3. Labor Cost Budget & Factory Overhead Budget
Fairy Tail Corporation pays its production personnel at a rate of P20 per direct labor hour. It takes 0.25
standard hours to complete a finished unit. The standard variable overhead rate is P5 per direct labor hour and the
standard fixed overhead rate is P4 per direct labor hour. The company’s normal capacity is 75,000 units or 18,750 direct
labor hours.
Required: 1. Prepare Schedule for Budgeted Labor Cost.
2. Prepare Schedule for Budgeted Factory Overhead.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016
Budgeted Production
x Standard Direct Labor Hours per Unit
Budgeted Labor Hours
x Direct Labor Rate per Hour
Budgeted Direct Labor Cost

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Budgeted Labor Hours
x Standard Variable Overhead rate
Budgeted Variable Factory Overhead
Fixed Factory Overhead
Budgeted Factory Overhead

4. Budgeted Income Statement

Consider the data and solutions above. The standard costs of Fairy Tail Corporation are summarized below:
Amount Rate Cost per
Needed per Unit
Unit
Direct Material 3 lbs. P 1.20 per lb. P3.60
Direct Labor 0.25 hr. 20.00 per hr. 5.00
Variable Factory Overhead 0.25 hr. 5.00 per hr. 1.25
Fixed Factory Overhead 0.25 hr. 4.00 per hr. 1.00
Total Standard Cost per Unit
The standard costs are the same form year 2015 to 2016. The work-in-process inventories are estimated at
10% of the current production put into process. The work-in-process on December 31, 2015 is determined at P75,000.
Operating Expenses are budgeted at 20% of sales in a quarter. Other income from operations are projected at 5% of
sales. The income tax rate is 30%.
Required: 1. Prepare Schedule for Budgeted Cost of Goods Manufactured and Sold.
2. Prepare Schedule for Budgeted Income Statement.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Direct Materials Used
Direct Labor
Factory Overhead
Total Factory Costs
+ WIP, Beg.
Total Costs put into Process
- WIP, End.
Cost of Goods Manufactured
+ Finished Goods, Beg
Total Goods Available for Sale
- Finished Goods, End.
Cost of Goods Sold

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year 2016

Sales
- Cost of Goods Sold
Gross Profit
- Operating Expenses
+ Other Income
Income before Tax
- Income Tax
Net Income (Loss)

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5. Cash Budget
All sales are made on credit. Receivables from customers are collected at 60% in the quarter of sales, 30% in
the quarter following sales, and 8% in the second quarter following sale. The remaining 2% is considered uncollectible.
The accounts receivable balance on December 31, 2015 is estimated to be P640,000; 25% of which is coming from the
3rd quarter sales of 2015.
Budgeted Collections from Customers
From sales of Credit Sales Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Quarter 3, 2015
Quarter 4, 2015
Quarter 1, 2016
Quarter 2, 2016
Quarter 3, 2016
Quarter 4, 2016
Budgeted collections
from customers

The terms of the purchase of materials is 2/30, n/45. The company pays 55% of its purchases in the quarter of
purchase. The remaining balance is paid in the following quarter. The accounts payable at December 31, 2014 are
recorded at P81,000.
Budgeted Payments to Merchandise Suppliers
To Purchases of Credit Purchases
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Quarter 4, 2015
Quarter 1, 2016
Quarter 2, 2016
Quarter 3, 2016
Quarter 4, 2016
Budgeted payments to
merchandise supplier

Fairy Tail Corporation pays its labor costs in the month the payroll is recorded. 30% of the total fixed overhead
is non-cash. Overhead costs are paid 90% in the quarter the overhead is incurred and the remainder is paid in the
month following the quarter of incurrence. The overhead costs incurred in the fourth quarter of 2014 are P84,000
variable and P70,000 fixed.
Budgeted Cash Payments to Labor & Overhead
Amount Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Variable Overhead:
Quarter 4, 2015
Quarter 1, 2016
Quarter 2, 2016
Quarter 3, 2016
Quarter 4, 2016
Budgeted Payments to
Variable Overhead

Cash Fixed Overhead:

Quarter 4, 2015
Quarter 1, 2016
Quarter 2, 2016
Quarter 3, 2016
Quarter 4, 2016
Budgeted Payments to
Fixed Overhead

Total Payments to Overhead

Direct Labor Payments
Budgeted Payments to
Conversion Costs

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 The actual of 2015 and the estimated accrued and prepaid items in 2016 are as follows:
Quarter 4, 2015 Quarter 1, 2016 Quarter 2, 2016 Quarter 3, 2016 Quarter 4, 2016
Accrued Expenses P 12,000 P15,000 P22,000 P14,000 P15,000
Prepaid Expenses 3,000 6,000 6,500 7,400 8,800
Accrued Income 4,400 900 3,500 7,900 8,600
Prepaid Income 2,100 3,300 4,400 9,700 8,200

Budgeted Cash Payments to Operating Expenses

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Operating Expenses Incurred
+ Accrued Expenses - beg
+ Prepaid Expenses - end
Total
- Accrued Expenses - end
- Prepaid Expenses - beg
Operating Expenses Paid

Budgeted Cash Receipts from Other Revenues

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Other Income Earned
+ Accrued Income - beg
+ Prepaid Income - end
Total
- Accrued Income - end
- Prepaid Income - beg
Other Income Received

Other cash transactions are as follows:

 Noncurrent assets are to be acquired in the second and third quarters in the amounts of P200,000 and
P145,000, respectively. Some old non-current assets are to be sold at its book value for P174,000 in the third
quarter.
 Dividends are to be paid in February for P400,000 and July for P250,000.
 The minimum cash balance is set at P400,000. In case of deficit, the corporation can avail a credit line in
multiples of P25,000 from a financing institution at a rate of 14% per annum. Interest is paid quarterly based
on outstanding balance at the beginning of the quarter. Payments to borrowings in multiples of P25,000 are
made whenever cash is available at the end of each quarter. The cash balance on January 1, 2016 is expected
to equal the minimum cash balance.

Cash Budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Cash Balance - Beginning
Add: Cash Receipts
+Collections from Customers
+From Other Income
+Sale of Noncurrent Assets
Total Cash Available for Use
Less: Cash Payments
-Merchandise Purchases
-Direct Labor Payments
-Factory Overhead Payments
-Operating Expenses Paid
-Acquisition of Noncurrent Assets
-Dividends Paid
Total Cash Payments
Cash Balance Before Financing
Financing Cash:
+Borrowings
-Payments to Borrowings
-Interests Paid
Cash Balance - Ending

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