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Functional and Activity-Based Budgeting 641 Problem 2 (Production and Purchases Budgets) Tiny Toys manufactures and distributes a number of products to retailers. One of these products, Toyclay, requires three pounds of material P214 in the manufacture of each unit. The company is now planning raw materials needs for the third quarter - July, August, and September. Peak sales of Toyclay occur in the third quarter of each year. To keep production and shipments moving smoothly, the company has the following inventory requirements: a. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 30% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 17,000 units. b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month's production needs for raw materials. The raw materials inventory on June 30 for material P214 is budgeted to be 64,500 pounds. c. The company maintains no work in process inventories. A sales budget for Toyclay for the last six months of the year follows: Budgeted Sales in Units July ........ 40,000 August............ 50,000 September ......... .. 70,000 October .......... 35,000 November .......... 20,000 December ............ 10,000 Required: 1. Prepare a production budget for Toyclay for the months July, August, September, and October. 2. Examine the production budget that you prepared. Why will the company produce more units than it sells in July and August and less units than it sells in September and October? 3. Prepare a budget showing the quantity of material P214 to be purchased for July, August and September and for the quarter in total.640 Chapter 15 IV. Problems Problem 1 (Schedule of Expected Cash Collections and Disbursements) Cookie Products, a distributor of organic beverages, needs a cash budget for September. The following information is available: a. The cash balance at the beginning of September is P9,000. b. Actual sales for July and August and expected for September as are follows: July August September Cash sales ............ P 6,500 P 5,250 P 7,400 Sales on account ..... 20,000 30,000 40.000 Total sales........ P26,500 P35,250 P47,400 Sales on account are collected over a three-month period in the following ratio: 10% collected in the month of sale, 70% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. c. Purchases of inventory will total P25,000 for September. Twenty percent of a month's inventory purchases are paid for during the month of purchase. The accounts payable remaining from August's inventory purchases total P16,000, all of which will be paid in September. d. Selling and administrative expenses are budgeted at P13,000 for September. Of this amount, P4,000 is for depreciation. e. Equipment costing P18,000 will be purchased for cash during September, and dividends totaling P3,000 will be paid during the month. f. The company must maintain a minimum cash balance of P5,000. An open line of credit is available from the company's bank to bolster the cash position as needed. Required: 1. Prepare a schedule of expected cash collections for September. 2. Prepare a schedule of expected cash disbursements during September for inventory purchases. 3. Prepare a cash budget for September. Indicate in the financing section any borrowing that will be needed during September.642 Chapter 15 Problem 3 (Cash Budget; Income Statement, Statement of Financial Position) The statement of financial position of Picture This, Inc., a distributor of photographic supplies, as of May 31 is given below: PICTURE THIS, INC. Statement of Financial Position May 31 Assets P 8,000 Cash..................... Accounts receivable ........ 72,000 30,000 Inventory ............. Buildings and equipment, net of depreciation... 500,000 Total assets........ P610,000 Liabilities and Equity Accounts payable, suppliers.. P 90,000 Note payable ......... 15,000 Share capital, no par........ 420,000 Retained earnings....... 85,000 Total liabilities and equity....... P610,000 Picture This, Inc., has not budgeted previously, and for this reason it is limiting its master budget planning horizon to just one month ahead - namely, June. The company has assembled the following budgeted data relating to June: a. Sales are budgeted at P250,000. Of these sales, P60,000 will be for cash; the remainder will be credit sales. One-half of a month's credit sales are collected in the month the sales are made, and the remainder is collected in the month following. All of the May 31 accounts receivable will be collected in June. b. Purchases of inventory are expected to total P200,000 during June. These purchases will all be on account. Forty percent of all inventory purchases are paid for in the month of purchase; the remainder is paid in the following month. All of the May 31 accounts payable to suppliers will be paid during June

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