COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

CBPA Building
Burauen Sports Complex, San Diego, Población District
Burauen, Leyte
Phone: 0977 313 2561
Email: [email protected]

OPERATIONAL BUDGETING
Budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be
acquired and used during a specified period of time while budgeting is the process of preparing the
budget.
Purpose of Budgeting System
1. Planning
2. Facilitating communication and coordination
3. Allocating resources
4. Controlling profit and operations
5. Evaluating performance and providing incentves.
Objectives of Budgeting
1. To find the most profitable direction which the operations can take
2. To develop in detail a balanced and coordinated program in that direction
3. To assist in controlling the operations in the execution of the programs
Classification of Budgets
1. Financial Budget is plan that shows how the organization will acquire its financial resources,
such as through the issuance of stock or incurrence of debt
2. Operating budget is plan on how an organization will carry out its operations in order to meet
the demand for its goods and services.
3. Master budget is a comprehensive sets of budgets that covers all phases of an organization’s
operations for a specified period of time.
4. Flexible budget is a budget that is valid for a range of activity
5. Rolling budget is a budget that is continually updated by adding another incremental time
period and dropping the most recently completed period
6. Capital budget is a long term budget the shows planned acquisition and disposal of capital
assets, such as land, buildings, and equipment.
Parts of Master Budget

 Operating budget
o Budgeted Income Statement
 Sales Budget
 Production Budget
 Materials Usage Budget
 Direct Labor Budget
 Factory Overhead Budget
 Cost of Goods Sold Budget
 Selling and Administrative Expenses Budget
 Financial Budget
o Cash Budget
o Budgeted Balance Sheet
o Budgeted Cash Flows Statement
Multiple Choice Questions: (Theory)
1. The process of creating a formal plan and translating goals into a quantitative format
a. Process Costing c. Budgeting
b. Activity Based Costing d. Variance Analysis

2. Which of the following best described the role of top management in the budgeting process?
a. Should be involved only in the approval process
b. Lacks the detailed knowledge of the daily operations and should limit its involvement
c. Needs to be involved, including using budget process to communicate goals
d. Needs to prepare the budgeting process and the business planning process into two
separate processes.

3. Which of the following is not a benefit of budgeting?

a. Management can plan ahead
b. An early warning system is provided for potential problems
c. It enables disciplinary action to be taken at every level of responsibility
d. The coordination of activities is facilitated

4. The essentials and effective budgeting do not include

a. Top-down budgeting c. Research and analysis
b. Management acceptance d. Sound organization structure

5. Compared to budgeting, long range planning generally has the

a. Same amount of detail c. Same emphasis
b. Long time period d. Same time period

6. A sales budget is
a. Derived from the production budget
b. Management’s best estimate of sales revenue for the year
c. Not the starting point for the master budget
d. Prepared only for credit sales

7. The formula for the production budget is budgeted sales in units plus
a. Desired ending merchandise inventory less beginning merchandise inventory
b. Beginning finished goods less desired ending finished goods units
c. Desired ending direct materials units less beginning direct materials units
d. Desired ending finished goods units less beginning finished goods units

8. Which of the following items is the last schedule to be prepared in the normal budget
preparation process?
a. Cash Budget c. Manufacturing overhead budget
b. Cost of goods sold budget d. Selling expenses budget

9. The master budget usually begins with the

a. Production budget c. Financial budget
b. Operating budget d. Sales budget

10. Which of the following statements is considered an advantage of budgeting?

a. Budgets are based on estimated which may require revisions or modifications
b. The budget program is merely a guide, not substitute for good management ability
c. Its aid directing capital and effort into most profitable channels
d. It takes time to develop a reasonable good budgetary program.

11. Which of the following objectives is not a primary purpose of preparing a budget?
a. To control income and expenditure in a given period.
b. To provide a basis for comparison of actual performance
c. To communicate the company’s plans throughout the entire business organization
d. To make sure the company expands its operations.
12. This budgeting system places the burden of proof on the manager to justify authority to spend
any money whether or not there was spending in the previous period. Different ways of
performing the same activity and different levels of effort for the activity is evaluated.

This system is called

a. Budgeting by alternatives.
b. Scenario budgeting.
c. Budgeting by responsibility and authority.
d. Zero-based budgeting.

13. On budgeting, all of the following are not valid, except

a. A sales budget and a sales forecast are the same thing.
b. Responsibility budget identifies revenue and costs with the individual responsible for
their incurrence.
c. The primary purpose of the cash budget is to show the expected cash balance at the
end of the budget period.
d. The best way to establish budget figures is to use last year’s actual cost and activity
data as this year’s budget estimates.

14. Which of the following statements is true?

a. Budget data are generally prepared by top management and distributed downward
in an organization
b. The budget committee is responsible for preparing detailed budget figures in an
organization.
c. The primary purpose of the cash budget is to show the expected cash balance at the
end of the budget period.
d. Under zero-based budgeting, a manager is required to start at zero budget levels each
period, as if the programs involved were being initiated for the first time.

15. Which of these statements are advantages of profit planning?

1. Develops profit-mindedness, encourages cost consciousness and resources utilization

throughout the company.

2. Provides vehicle to communicate objectives, gain support for the plan, of what is
expected, thereby developing a sense of commitment to achieve established goals.

3. Provides yardstick to evaluate actual performance; encouraging efficiency, increasing

output and reducing cost.

4. Provides a sense of direction for the company and enhances coordination of business
activity.

5. Eliminates or takes over the role of administration by providing detailed information that
allows executives to operate toward achievement of the organization’s objectives.

a. Statements 1, 2, 3, and 4 only. c. Statements 3, 4, and 5 only.

b. Statements 1, 3, and 4 only. d. All five statements.
Situational Problems:
Problem 1
Budgeted sales for the first six months of 2019 for Henry Corp. are listed below:

Jan Feb Mar Apr May June

UNITS: 6,000 7,000 8,000 7,000 5,000 4,000

Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the
next month's budgeted sales. If Henry Corp. plans to produce 6,000 units in June, what are
budgeted sales for July?
a. 1,000 units c. 8,000 units
b. 3,600 units d. 9,000 units

Problem 2
Beatless Corp, plans to sell 200,000 units of Let-It-Be product in July and anticipate a growth in
sales of 5% per month. The target ending inventory in units of the product is 80% of the next
month’s estimated sales. There are 150,000 units in inventory as of the end of June. The
production requirement in units of Let-It-Be for the quarter ending September 30 would be
a. 665,720 c. 675,925
b. 670,560 d. 691,525

Problem 3
Mien Co. is budgeting sales of 53,000 units of product Nous for October 2019. The manufacture
of one unit of Nous requires 4 kilos of chemical Loire. During October 2019, Mine plans to reduce
the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000
units. There is no Nous work in process inventory. How many kilos of Loire is Mien budgeting
to purchase in October 2019?
a. 138,000 c. 186,000
b. 162,000 d. 238,000

Problem 4
Happy Company’s 2019 budget contains the following information:

Beginning finished goods inventory 85 units

Beginning work in process in equivalent units 10 units
Desired ending finished goods inventory 100 units
Desired ending WIP in equivalent unit 40 units
Projected sales 1,800 units

How many equivalent units should Happy plans to produce in 2019?

a. 1,800 c. 1,815
b. 1,565 d. 1,845

Problem 5
Red Bird Company has developed the following sales projections for calendar year 2019

May P100,000

June 120,000

July 140,000

August 160,000

September 150,000

October 130,000

Normal cash collections experience has been that 50% of sales is collected during the month of
sale and 45% in the month following sale. The remaining 5% of sales is never collected. Red
Bird’s budgeted cash collections for the third calendar quarter are:
a. P450,000 c. P414,000
b. P440,000 d. P360,000
Problem 6
In preparing a cash budget for July 2019, Yahoo Company made the following projection:
Sales P1,500,000
Gross profit percentage based on sales 25%
Decrease in inventories 70,000
Decrease in accounts payable for inventories 120,000

For July 2019, what were the estimated cash disbursements for inventories?
a. P935,000 c. P1,055,000
b. P1,050,000 d. P1,175,000

Problem 7
Budji Corp. is preparing its budget for 2020. For 2019, the following were reported:

Sales (100,000 units) P1,000,000

Cost of Goods Sold 600,000
Gross Profit P 400,000
Operating Expenses (including depreciation of P40,000) 240,000
Net Income P 160,000

 Selling prices will increase by 10% and sales volume in units will decrease by 5%.
 The cost of goods sold as a percent of sales will increase to 62%.
 Other than depreciation, all operating costs are variable.

Budji will budget a net income for 2020 of

a. P167,100 c. P168,000
b. P167,500 d. P176,000

Problem 8
It is budgeting time for Del Co. The following assumptions were agreed upon for the next year after
a strategic planning session which covered a five-year horizon

1. Sales is estimated to be at 70,000 units at its national selling price of P126.00. 75% of
total sales are on credit. 1.5% of net sales is provided for doubtful accounts.
2. Sales discounts are given to various customers at different rates and net to gross ratio is
at 93%
3. Mark-up on merchandise is at 45% of invoice cost. Beginning inventory is P80,900 and
is expected to be reduced by P15,000 at the end of the period.
4. Selling and administrative expenses is expected to be 15% of gross sales.
5. Depreciation is computed at P500,000.

The projected operating income for the year is

A. P173,802 C. P252,741
B. P252,341 D. P296,841

Problem 9
Mega Drive, a computer disk storage and back-up company, uses accrual accounting. The company’s
Statement of Financial Position for the year ended November 30, 2019 is as follows:

Mega Drive
Statement of Financial Position
November 30, 2019
Assets

Cash P 52,000

Accounts Receivable net 150,000

Inventory 315,000
 PPE 1,000,000

Total Assets P 1,517,000

Liabilities and SHE

Accounts Payable P 175,000

Common Stock 900,000

Retained Earnings 442,000

Total Liabilities and SHE P 1,517,000

Additional Information:
 Sales are budgeted at P520,000 for December 2019 and P500,000 for January 2020.
 Collections are expected to be 60% in the month of sale and 40% in the month following
the sale.
 80% of the disk drive components are paid in the month prior to the month of sale, and
20% are paid in the month of sale. Purchased components are 40% of the cost of goods
sold.
 Payment for the components is made in the following the purchase.
 Cost of goods sold is 80% of sales.
Required: Compute the following
a. The budgeted cash collections for the month of December 2019.
b. The projected balance in accounts payable on December 31, 2019.
c. The projected gross profit for the month ending December 31, 2019.

Problem 10
The following information has been gathered by the Budget Director of MAHAL Company, another
outfit managed by the LOVERS Company. The firm manufactures and sells only one product. The
selling price during the coming month is expected to be prevailing price of P5.00 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 beginning of the month total 42,000 units.

Direct labor cost is P3 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 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 materials is used to produce the finished goods. One and one half gallons of raw materials
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 are expected to be on hand at
the ned of the month total 8,000 gallons.

Variable administrative and selling expenses is P1.00 per unit.

Required: Compute for the following:

a. Total expected peso sales
b. Finished goods in units to be produced during the month
c. Budgeted cost of raw materials to be used in production
d. Budgeted raw materials purchases cost
e. Budgeted direct labor cost
f. Variable overhead cost per direct labor hour
g. Fixed overhead cost per direct labor hour
h. Budgeted contribution margin
i. Budgeted cost of goods sold (full costing)
j. Net profit before tax