FIN 073: Strategic Cost Management

Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Lesson title: Financial Planning and Budgeting Materials:

Lesson Objectives: Pen and non-scientific calculator
At the end of this module, you should be able to: Strategic Cost Management by
1. Identify the components of operating and financial Hansen and Mowen
budget.
2. Prepare a production budget. References:
3. Managerial Accounting by Hilton
truesky.com
MAS reviewer by NFCPAR

Productivity Tip:
Exercise. Exercising regularly not only helps in staying healthy but it can also give your body
hormones that it needs to be relaxed, focused, and more productive during the day.

A. LESSON PREVIEW/REVIEW
1) Introduction
Budget is an important tool for a business. A well develop budgeting system provides a great help
for planning, facilitating communication and coordination, allocating resources, managing financial
and operational performance, evaluating performance, and providing incentives.

2) Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned (Activity 4)

1. What is a master budget?

2. What are the components of

operating budget?

3. What are the components of

financial budget?

B.MAIN LESSON
1) Activity 2: Content Notes

Lesson Objective 1

Master Budget – the overall plan of the firm for a given period.

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

The master budget is composed of the following:

A. Operating Budget B. Financial Budget
1. Sales Budget 10. Cash Receipts Budget
2. Ending Finished Goods Inventory Budget 11. Cash Disbursement Budget
3. Production Budget 12. Cash Budget
4. Direct Materials Budget 13. Budgeted Statement of Cash Flow
5. Direct Labor Budget 14. Budgeted Statement of Financial
Position
6. Manufacturing Overhead Budget
7. Budgeted Cost of Goods Sold
8. Selling and Administrative Expense Budget
9. Budgeted Income Statement

The Budgeting Process

1. Sales budget – a schedule showing the expected sales (amount & units) over specific time period.
- “the key” to budgeting process.

Factors Considered in Sales forecast

a. industry trends e. marketing strategies (pricing policy, promotions)
b. economic and political conditions f. past sales volume and projected expansion
c. level of competition g. plant capacity
d. customer preferences

Methods of forecasting
a. sales department estimates c. survey of executive opinions e. industry trend analysis
b. survey of customers d. statistical methods

2. Ending finished goods inventory budget – a budget showing the amount of cost expected to
appear on the balance sheet for unsold units at the end of a period

Lesson Objective 2
3. Production budget – a detailed plan showing the number of units that must be produced during a
period to meet both sales and inventory requirements.
To compute for the units to be produced:
Budgeted Production
Estimated Unit Sales xx
Desired Inventory – End xx
Total needs xx
Expected Inventory – Beginning (xx)
Units to be produced xx

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

4. Direct materials budget – a detailed plan showing the amount of raw materials that must be
purchased during a period to meet both production and inventory needs.

To compute for materials purchases:

Budgeted Materials Purchases
Units to be produced xx
x Qty. of materials/unit xx
Materials to be used xx
Desired materials inventory – end xx
Total requirements xx
Expected materials inventory - beg (xx)
Budgeted materials purchases xx

Illustration:
Lubriderm Corporation has the following budgeted sales for the next six-month period:

Month Unit Sales

June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an
inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs ₱8.
Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on
June 1 was 15,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and pesos for each month.
Answer:
a. July August September
Estimated unit sales 120,000 210,000 150,000
Add: Desired ending inventory 42,000 30,000 36,000

Total inventory needs 162,000 240,000 186,000

Less: Beginning inventory 24,000 42,000 30,000

Units to be produced 138,000 198,000 156,000

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

b. July August September

Units to be produced 138,000 198,000 156,000
Quantity of material per unit x5 x5 x5
Production needs in lbs. 690,000 990,000 780,000
Add: Desired ending inventory in lbs.* 297,000 234,000 **
252,000
Total requirements in lbs. 987,000 1,224,000 1,032,000
***
Less: Beginning inventory in lbs. 207,000 297,000 234,000
Purchases needed in lbs. 780,000 927,000 798,000
Cost (₱8 per lb.) x ₱8 x ₱8 x ₱8
Total material purchases ₱6,240,000 ₱7,416,000 ₱6,384,000
*
0.3 times next month's needs
**
(180,000 + 24,000 - 36,000) times 5 lbs. x 0.3
***
(690,000 x .3) = 207,000 lbs.

5. Direct labor budget – a detailed plan showing labor requirements over specific period of time.

6. Manufacturing overhead budget – a detailed plan showing the production costs, other than direct
materials and direct labor, which will be incurred over specific period of time.

7. Budgeted Cost of Sales – a budget that shows the cost of goods produced, cost of goods available
at the beginning and end of period, as well as the cost of goods sold for a specific period.

8. Selling and Administrative Expense budget – a detailed schedule of planned expenses that will
be incurred in areas other than production, over specific time period.

9. Budgeted Income Statement – a detailed plan showing the overall result of operations over a
specific period

For further concepts and illustrations of preparing operating budget, read your book on pages 170–184.

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

1) Activity 3: Skill-building Activities

Exercise 1
Spirit Company sells three products with the following seasonal sales pattern:
Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 40%
3 20% 20% 40%
4 10% 30% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per
unit as follows:
Product Units Selling Price
A 50,000 ₱4
B 125,000 10
C 62,500 6
Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Exercise 2
Gerdie Company has the following information:
Month Budgeted Sales
March ₱50,000
April 53,000
May 51,000
June 54,500
July 52,500

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of
sales.

Required:
Prepare a purchases budget for April through June.

Check your answers against the Key to Corrections found at the end of this SAS. Be sure to complete
each activity before looking. Write your score on your paper.

2) Activity 4: What I Know Chart, part 2

Let us see how your knowledge changed by reviewing the questions in the What I Know Chart
from Activity 1. Write your answers to the questions based on what you now know in the third
column of the chart.

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

3) Activity 5: Check for Understanding

Test 1
DTG Corporation manufactures artistic frames for sunglasses. Tina Warren, controller, is
responsible for preparing the company’s master budget. In compiling the budget data for 2020, Tina
Warren has learned that new automated production equipment will be installed on March 1. This will
reduce the direct labor per frame 1 hour to .75 hours.
Labor-related cost include pension Contributions of P0.50 per hour, worker’s compensation
insurance of P0.20 per hour, employee medical insurance of P0.80 per hour, and the employer
contributions to Social Security equals to 7% of direct-labor wages. The cost of the employee benefits
paid by the company on its employees is treated as direct-labor cost. DTG Corporation has a labor
contract that calls for a wage increase to P18.00 per hour on April 2020. Management expects to have
32,000 frames on hand at December 31, 2019, and has a policy of carrying an end-of-month inventory
of 100% of the following month’s sales plus 50% of the second following month’s sale.

These and other data compiled by Tina Warren are summarized in the following table:

JANUARY FEBUARY MARCH APRIL MAY

Direct-labor hours per unit 1.0 1.0 0.75 0.75 0.75
Wages per Direct-labor hour P16.00 P16.00 P16.00 P18.00 P18.00
Estimated Unit Sales 20,000 24,000 16,000 18,000 18,000
Sales Price per Unit P50.00 P47.50 P47.50 P47.50 P47.50
Production Overhead:
Shipping and Handling P3.00 P3.00 P3.00 P3.00 P3.00
Purchasing, material handling and
inspection (per unit produced) P4.50 P4.50 P4.50 P4.50 P4.50
Other Production Overhead (per direct-
P10.50 P10.50 P10.50 P10.50 P10.50
labor hours)

Required:
1. Prepare a production budget and a direct-labor budget for DTG Corporation by month and in total for
the first quarter of 2020. Both budgets may be combined in one schedule. The direct-labor budget
should include direct-labor hours and show the detail for each direct-labor cost category.
2. Prepare a production-overhead budget for each month and for the first quarter.

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 FIN 073: Strategic Cost Management
Student Activity Sheet #20

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Test 2
Michelle Enterprises reports the year-end information from 20x2 as follows:

Sales (100,000 units) ₱250,000

Less: Cost of goods sold 150,000
Gross profit 100,000
Operating expenses (includes ₱10,000 of Depreciation) 60,000
Net income ₱ 40,000

Michelle is developing the 20x3 budget. In 20x3 the company would like to increase selling prices by
10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of
sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.

Required:
Prepare a budgeted income statement for 20x3.

Check your answers against the Key to Corrections found at the end of this SAS. Be sure to complete
each activity before looking. Write your score on your paper.

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