Chapter 6.Short-term Budgeting

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CHAPTER 6 SHORT-TERM BUDGETING

[Problem 1]

Zamboanga Company Production Budget

For the Third Quarter, July-September, 200X

July August September Total

Budgeted sales 30,000 45,000 60,000 135,000

Add: Finished goods – end.

(40% x next month's sales) 18,000 24,000 20,000 20,000

Total goods available for sale 48,000 69,000 80,000 155,000

Less: Finished goods – beg. 10,000 18,000 24,000 10,000

Budgeted production 38,000 51,000 56,000 145,000

[Problem 2] Aparri Company

Budgeted Materials Purchases

For The Year Ended, December 31, 2005

Q1 Q2 Q3 Q4 Total

Budgeted production (units) 80,000 120,000 200,000 180,000 580,000

x Standard materials/unit 3 3 3 3 3

Materials used 240,000 360,000 600,000 240,000 1,740,000

Add: Materials inventory - end

(20% x next quarter's sales) 72,000 120,000 108,000 54,000(1) _54,000

Total materials 312,000 480,000 708,000 594,000 1,794,000

Less: Materials inventory-beg. 42,000 72,000 120,000 108,000 42,000

Materials purchase (units) 270,000 408,000 588,000 486,000 1,752,000

x Standard materials cost per unit P 200 P 200 P 200 P 200 P 200

Budgeted materials purchases

(pesos) P 54,000,000 P 81,600,000 P117,600,000 P97,200,000 P350,400,000

(1)_{90000 x 3 x 20% = 54,000}

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a. Cagayan Corporation Budgeted Production

For The Second Quarter, April-June 20__

April May June Total

Budgeted sales (units) 90,000 98,000 45,000 233,000

Add: Finished goods inventory - ending (1) _25,600 _15,000 _12,000 _12,000

Less: Finished goods inventory - beginning 14,000 25,600 15,000 14,000

Budgeted Production 101,600 87,400 42,000 231,000

(1) _{FG, end = 6000 + 20% (next month’s sales)}

FG- 6/30 = 6,000 + 20% (30,000) = 12,000 units b. Cagayan Corporation

Budgeted Raw Materials Purchases For The Second Quarter, April-June, 20__

April May June Total

Budgeted Production (units) 101,600 87,400 42,000 231,000

x Standard materials / unit 4 lbs. 4 lbs. 4 lbs. 4 lbs.

Materials used (lbs.) 406,400 349,600 168,000 924,000

Add: Materials inventory – ending

(1/4 x next month’s sales) 87,400 42,000 30000(1) _30,000

Total materials 493,800 391,600 198,000 954,000

Less: Materials inventory - beginning 60,000 87,400 42,000 60,000

Budgeted materials purchase (in lbs.) 433,800 304,200 156,000 894,000

(1) _{Materials inventory - 6/30 = 30,000 x 4 lbs. x 1/4 = 30,000 lbs.}

[Problem 4]. a. JVC Company

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Budgeted Production and Direct Labor Costs For The First Quarter, January – March, 20B

January February March Total

Budgeted sales 10,000 12,000 8,000 30,000

Add: Finished goods - ending (1) 16,000 12,500 13,500 13,500

Total goods 26,000 24,500 21,500 43,500

Less: Finished goods - beginning 16,000 16,000 12,500 16,000

Budgeted production 10,000 8,500 9,000 27,500

x DLH per unit 2 2 2 2

Budgeted DLH 20,000 17,000 18,000 55,000

x DL rate per hour P 8 P 8 P 8 P 8

Budgeted direct labor wages 160,000 136,000 144,000 440,000

Pensions contribution (P0.25 / hr) 5,000 4,250 4,500 13,750

Workers' compensation insurance

(P0.10 per hour) 2,000 1,700 1,800 5,500

Employee medical insurance

(P0.40 per hour) 8,000 6,800 7,200 22,000

Social security and employment taxes

(10% of wages) 16,000 13,600 14,400 44,000

Budgeted direct labor costs P 191,000 P 162,350 P 171,900 P 525,250

(1) _{FG – ending = (100% x next month’s sales) + (50% x 2}nd_{month’s sales)}

b. 1. Budgeted production - also used in direct materials purchase budget, factory overhead budget and master budget

2. Budgeted direct labor hours - used in budgeted variable factory overhead and master budget

[Problem 5]

a. Bacolod Corporation Budgeted Production

For The Third Quarter, July – September, 20A

July August September Total

Budgeted sales (units) 5,000 6,000 7,000 18,000

Add: Finished goods inventory - ending

(80% x next month's sales) 4,800 5,600 5,600 5,600

Less: Finished goods inventory - beginning 5,600 4,800 5,600 5,600

Budgeted production (units) 4,200 6,800 7,000 18,000

b. Bacolod Corporation

Budgeted Direct Materials Budget

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Materials

101 211 242

Budgeted production 18,000 18,000 18,000

x Standard materials per unit 6 4 2

Materials requirement 108,000 72,000 36,000

Add: Materials inventory - ending (1) _42,000 _28,000 _14,000

Total materials 150,000 100,000 50,000

Less: Materials inventory - beginning 35,000 32,000 14,000

Materials purchase (units) 115,000 68,000 36,000

x Materials cost per unit P 0.40 P 3.60 P 1.20

Materials purchase (pesos) P 46,000 P 244,800 P 43,200

(1)_{Mat. Inventory – 7/30}

101 = 7,000 x 6 = 42,000 units 211 = 7,000 x 4 = 28,000 units 242 = 7,000 x 2 = 14,000 units

c. Bacolod Corporation

Budgeted Direct Labor Costs

Forming Assembly Finishing Total

Budgeted production (units) 18,000 18,000 18,000

X Standard hours per unit 0.80 2.00 0.25

Budgeted direct labor hours 14,400 36,000 4,500 54,900

X Direct labor rate per hour P 8.00 P 8.00 P 8.00

Budgeted direct labor costs P115,200 P198,000 P 27,000 P340,000

d. Bacolod Corporation

Budgeted Factory Overhead

Flexible

Rate Budget

Variable overhead per unit (33,000 units)

Supplies P 2.20 P 72,600

Electricity 1.00 33,000

Indirect labor 2.00 66,000

Other 0.80 26,400

Total variable overhead P 6.00 198,000

Fixed overhead

Supervision 30,000

Property tax 3,600

Depreciation 33,200

Other 16,200

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Budgeted factory overhead P 281,000 [Problem 6]

a. Ilocos Corporation Sales Budget

For The Year Ended, December 31, 20B

Thingone Thingtwo

Budgeted sales (units) 60,000 40,000

x Unit sales price P 70 P 100

Budgeted sales (pesos) P 4,200,000 P 4,000,000

b. Ilocos Corporation Budgeted Production

For The Year Ended, December 31, 20B

Thingone Thingtwo

Add: Finished goods inventory - 01/01 20,000 8,000

Total goods available for use 80,000 48,000

Less: Afinished good inventory - 12/31 25,000 9,000

Budgeted production (units) 55,000 39,000

c. Ilocos Corporation

Budgeted Raw Materials Purchases For the Year Ended, December 31,20B

Material

A B C

Budgeted materials need

Thingone (55,000 x 4 lbs.) 220,000 lbs.

(55,000 x 2lbs.) 110,000 lbs.

Thingtwo (39,000 x 4 lbs.) 156,000

(39,000 x 2lbs.) 78,000

(39,000 x 1lb.) 39,000 lbs.

Total materials need 376,000 188,000 39,000

Add: Materials inventory - 12/31 36,000 32,000 7,000

Total 412,000 220,000 46,000

Less: Materials inventory - 01/01 32,000 29,000 6,000

Materials purchases (lbs.) 380,000 191,000 40,000

x Materials cost per lb. P 8 P 5 P 3

Budgeted materials purchases (pesos) P 3,040,000 P 955,000 P 120,000

d. Ilocos Corporation

Budgeted Direct Labor Cost Budget For The Year ended, December 31, 20B

Thingone Thingtwo

Budgeted production (units) 55,000 39,000

x No. of hours per unit 2 3

Direct labor hours 110,000 117,000

x Standard DL rate per hour P 8 P 9

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e. Ilocos Corporation

Budgeted Finished Goods Inventory – 12/31 December 31, 20B

Thingone Thingtwo

Finished goods inventory - 12/31 25,000 9,000

x Unit costs: Materials [(4 x P8) + (2 x P5)] P 42 [(5 x P8) + (3 x P5) + 1 x P3)] P 58 Direct labor (2 x P8) 16 (3 x P9) 27 Applied FOH (2 x P2) 4 ( 3 x P2) 6

Total unit costs 62 91

Budgeted finished goods inventory - 12/31 P 1,550,000 P 819,000 [Problem 7] a. Sorsogon Corporation Flexible Budgets Machine Hours Rate 6,000 7,000 8,000 9,000 Variable costs Direct materials (P2 x 4) P8.00/MH P 48,000 P 56,000 P 72,000 P 176,000 Direct labor 1.50/MH 9,000 11,250 12,000 13,500 Supplies 0.80/MH 4,800 5,600 6,400 7,200 Utilities 1.20/MH 7,200 8,400 9,600 10,800 Maintenance 0.30/MH 1,800 2,100 2,400 2,700 Sub-total P11.80/MH 70,800 83,350 102,400 210,200 Fixed costs Utilities 4,000 4,000 4,000 4,000 Maintenance 6,000 6,000 6,000 6,000 Depreciation 12,000 12,000 12,000 12,000 Sub-total 22,000 22,000 22,000 22,000

Budgeted total costs P 92,800 P 105,350 P 124,400 P 232,200

b. Variable costs (7,000 MH x P11.80) P 82,600

Fixed costs 22,000

Budgeted cost – 7,000 MH P104,600

c. Variable costs (8,000 MH x P11.80) P 94,400

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Budgeted costs – 8,000 MH (standard) P104,600

d. Actual manufacturing costs P 61,200

Less: Standard manufacturing costs 104,600

Manufacturing variance P(43,400) F

[Problem 8] Abra Company

Schedule of Accounts Receivable Collections July – September 20__

Credit

Month of Sale Sales July August September Total

May P 550,000 P 55,000 P 55,000 June 600,000 180,000 P 60,000 240,000 July 800,000 188,160 240,000 P 80,000 796,160 288,000 August 900,000 211,680 210,000 745,680 324,000 September 1,000,000 235,200 595,200 360,000

Budgeted collections from customer P 711,160 P 835,680 P 885,200 P 2,432,040

[Problem 9] 1. May sales (P150,000 x 20%) P 30,000 April sales (P180,000 x 50%) 90,000 March sales (P100,000 x 25%) 25,000 May collections P 145,000 2. February sales (P160,000 x 5%) P 8,000 March sales (P100,000 x 30%) 30,000 April sales (P180,000 x 80%) 144,000 Accounts receivable - 4/30 P 182,000 3. February sales (P160,000 x 5%) P 8,000 March sales (P100,000 x 5%) 5,000 April sales (P180,000 x 30%) 54,000 May sales (P150,000 x 80%) 120,000 Accounts receivable - 5/31 P 187,000

4. Steps to reduce the balance in accounts receivable: a. Shorter credit period

a1. Risk. Customer, especially those who have been accustomed with larger and longer credit term, may negatively react and look for a new supplier that will offer them a longer credit period so as not to strain their working capital requirement.

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a2. Advantage.It would reduce investment in accounts receivable balance, bad debts, collection costs and would increase income on investment.

b. Strengthen collection policies:

b1. Risk. Some customers may have an operating cycle longer than the offered credit terms and may not have the ability to meet accelerated payments. b2. Advantage.Increase cash inflows.

[Problem 10]

Lantoting Company

Budgeted Cash Payments to Merchandise Supplies For the Month of May, 20__

May April

Budgeted sales (in units) 10,000 9,000

Add: Finished goods inventory - 5/1

(20% x 10,000) 2,000 1,800 (20% x 9,000)

Total goods available for sale 12,000 10,800

Less: Finished goods inventory - 5/31

(20% x 12,000) 2,400 2,000

Budgeted production 9,600 8,800

x Standard materials per unit 3 3

Materials used 28,800 26,400

Add: Materials inventory 5/1

(40% x 28,800) 11,520 10,560 (40% x 26,400)

Total materials 40,320 36,960

Less: Materials inventory - 5/31

(40% x 12,200 units x 3 units) 14,640 11,520

Materials purchase (units) 25,680 25,440

x Materials cost per unit P 20 P 20

Budgeted May purchases P 513,600 P 508,800

Payments to:

April purchases (P508,800 x 10/30 x 98%) P 166,208

May purchases (P513,600 x 20/30 x 98%) 335,552

P 501,760

[Problem 11] Cash paid for purchases in July = ?

June July

Add: Finished goods inventory - beginning 5,000 3,000

Total goods for sale 55,000 33,000

Less: Finished goods inventory - ending 3,000 3,000

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x Standard materials per unit 3 3

Materials used 150,000 90,000

Add: Materials inventory - beginning 20,000 14,000

Total materials 170,000 104,000

Less: Materials inventory - ending 14,000 11,000

Materials purchase (units) 156,000 93,000

x Standard materials per unit P 5 P 5

Materials purchase (pesos) P 780,000 P 465,000

June purchases paid in July (P 780,000 x 1/3 x 98%) P 254,800 July purchases paid in July (P 465,000 x 2/3 x 98%) 303,800

Cash payments to merchandise suppliers – July P 558,600

[Problem 12]

a. Budgeted cash disbursements in June and July:

June July Materials Current month (P 243,600 x 54%) P 131,544 P 132,408(P 245,000 x 54%) 1-month prior (P225,000 x 46%) 103,500 112,056(P 243,600 x 46%)

Wages and salaries 38,000 38,000

Marketing, general and administrative expenses

Current month (P49,300 x 54%) 26,622 28,080 (P52,000 x 54%))

1-month prior (P51,550 x 46%) 23,713 22,678 (P49,300 x 46%))

Budgeted cash disbursements

P 323,379

P 333,222

1)

May June July

Materials used (units) 11,900 11,400 12,000

Materials inventory - ending

(130% x next month’s production

requirements) 14,820 15,600

(12,200 x 130%) 15,860

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(130% x 11,900) (15,470) (14,820) (15,600)

Materials purchases (units) 11,250 13,180 12,260

x Cost of materials per unit P 20 P 20 P 20

Budgeted materials purchases (pesos) P 225,000 P 243,600 P 245,200 2) M, G and AE = (15% x sales) – P 2000

May = (15% x P 357,000) – P 2,000 = P 51,550 June = (15% x P 342,000) – P 2,000 = P 49,300 July = (15% x P 360,000) – P 2,000 = P 52,000 b. Budgeted cash collections in May and June:

May June

From March sales (P 354,000 x 9%) P 31,860 P

-From April sales (P 363,000 x 60% x 97%) 211,266 33,670 (P363,000 x 9%) (P 363,000 x 25%) 90,750

From May sales (P357,000 x 60% x 97%) 207,774

(P357,000 x 25%) 89,250

Collections from customers P333,876 P329,694

c. Materials purchases in units in July is 13,840 units. [Problem 13]

V. jovi Band company Cash Budget

For The Quarter Ending, March 31,

-January February March Total

Collections from sales

January sales 84,672 108,000 136,800 351,072 21,600 February sales 104,760 135,000 266,760 27,000 March sales 111,744 140,544 28,800 Total collections 106,272 239,760 412,344 758,376 Payments: Materials supplies 89,200 60,400 65,600 215,200

Direct labor (Bud, Prod x P 30) 73,800 90,600 98,400 262,800

Variable OH (Bud. Prod x P 15) 36,900 45,300 49,200 131,400

Fixed OH (5000 x P 25) 125,000 125,000 125,000 375,000

Var. expenses (Sales x 11) 26,400 33,000 35,200 94,600

Fixed expenses (P 12000 x P5000) 17,000 17,000 17,000 51,000

Total 368,300 371,300 390,400 1,130,000

Net operating cash inflows (outflows) (262,028) (131,540) 21,944 (371,624)

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C. Salonga investment 50,000 - - 50,000

Bank loan 150,000 - - 150,000

Acquisition of assets (200,000) - - (200,000)

Interest payments (3,000) (3,000) (3,000) (9,000)

Principal payments - - (30,000) (30,000)

Net investing and financing activities (3,000) (3,000) (33,000) (39,000)

Net cash inflows (outflows) (265,028) (134,340) (11,056) (410,624)

Add: Cash balance, beginning 0 10,000 10,000 0

Cash balance , ending, before

Financing (265,028) (124,540) (1,056) (410,624)

Borrowings 275,028 134,540 11,056 420,624

Cash balance - end P 10,000 P 10,000 P 10,000 P 10,000

Schedules:

1. January February March

Budgeted sales (@ 150) 2,400 3,000 3,200

Finished goods inventory - ending

[100 + (10% x next month's sales)] 400 420 500

Finished goods inventory - beginning

[100 + (10% x 24,000)] (340) (400) (420)

Budgeted production 2,460 3020 3,280

2.

Budgeted materials purchases (units)

(2460 + 2000) 4,460 3,020 3,280

x Materials cost/unit P 20 P 20 P 20

Budgeted materials purchase (pesos) P 89,200 P 60,400 P 65,600

[Problem 14]

a. Schedule of cash collections in September:

July credit sales (P 400,000 x 8%) P 32,000

August credit sales (P 500,000 x 70%) 350,000 September credit sales (P 580,000 x 20%) 116,000

September cash sales 280,000

September collections P 778,000

b. Schedule of payments to suppliers in September:

August purchases P 105,000

September purchases (P 250,000 x 25%) 62,500

September payments to suppliers P 167,500

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Cash budget

For The Month of September, 2000

Cash balance, Sept. 01 P 80,000

Add: Cash collections from sales 778,000

Total cash 858,000

Less: Payments:

To merchandise suppliers P 167,500 Selling and administrative expenses 80,000

Dividends 40,000 287,500

Cash balance, Sept. 30 P 570,500

[Problem 15]

1. Cricket Company Cash Budget

For The Month Ended, July 30, 20__

Cash balance, July 1 P 5,000

Add: Collections from customers:

June sales (P 30,000 x 48%) P 14,400 July sales (P 40,000 x 50%) 20,000 34,400 Total cash 39,400 Less: Payments: Merchandise suppliers June purchase (P10,000 x 50%) P 5,000 July purchase (P 15,000 x 50%) 7,500 12,500 Marketing and administrative expenses 10,000

Dividends 15,000 37,500

Cash balance before financing 1,900

Add: Borrowings (P 5,000 – 1,900) 3,100

2. Financial actions to be taken:

a. Find ways to reduce cost and expenses b. Find ways to increase sales

[Problem 16]

a. La Union Corporation Budgeted Cash Collections October – December 2000

Month of sales Amount October November December Total

Previous to October P 245,000 P 210,000 P 30,000 P 240,000 October sales 1,050,000 315,000 630,000 P 73,500 1,018,000 November sales 900,000 270,000 540,000 810,000 December sales 850,000 75,000 75,000 Collections from customers P 525,000 P 930,000 P 688,500 P2,143,500

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b. La Union Corporation Cash Budget

For The Fourth Quarter, October – December 2000

October November December Total

Collections from customers P 525,000 P 930,000 P 688,500 P 2,143,500 Payments: Merchandise purchases 520,000 720,000 620,000 1,860,000 Payroll 120,000 110,000 115,000 345,000 Lease payments 20,000 20,000 20,000 60,000 Advertising 70,000 80,000 80,000 230,000 Equipment purchases 30,000 - - 30,000 Total 760,000 930,000 835,000 2,525,000

Operating inflows (outflows) (235,000) 0 (146,500) (381,500)

Proceeds of loan 300,000 - - 300,000

Interest payment (12,000) (12,000) (12,000) (36,000)

Net cash inflows (outflows) 53,000 (12,000) (158,500) (117,500)

Cash balance - beginning 250,000 303,000 291,000 250,000

Cash balance - ending P 303,000 P 291,000 P 132,500 P 132,500

[Problem 17]

a. Collections from customers – July 2007

Cash sales P 350,000

July sales [(P 1,500,000 – P 350,000) x 70%] 805,000

June sales 420,000

July collections P 1,575,000

b. Cash payments to suppliers – July 2007

July purchases (P 800,000 x 40%) P 320,000

June purchases 280,000

July payments to suppliers P 600,000

c. Ilocos Norte Corporation Cash Budget

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For The Month Ended July 31, 2007

(1)_{Operating expenses incurred} _P _320,000

Accrued expenses – beginning 45,000

- end (60,000)

Prepaid expenses – beginning (23,000)

- end 34,000

Operating expenses paid P 316,000

d. Ilocos Norte Corporation Income Statement

For The Month Ended, July 31, 2007

Sales P 1,500,000

Less: Cost of goods sold:

Inventory, July 1 P 350,000

Add: Purchases 800,000

Total goods available for use 1,150,000

Less: Inventory, July 31 400,000 750,000

Gross profit 750,000

Less: Operating expenses 320,000

Depreciation expense 15,000 335,000

Add: Collections from customers P 1,575,000

Other revenues 30,000

Bank borrowings 150,000 1,755,000

Total cash available for use 1,835,000

Less: Payments

Merchandise suppliers 600,000

Operating expenses (1) _316,000

Note payable paid

Equipment purchases 60,000

Interest 2,000 1,178,000

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Operating Income 415,000

Add: Other revenues (1) _26,500

Interest expense (2,000) 24,500

Net Income P 439,500

(1)_{Cash received form other revenues} _P _30,000

Accrued income – July 1 (12,000)

- July 31 14,500

Deferred revenues – July 1 3,000

- July 31 (9,000) Other revenues earned P 26,500

[Problem 18] a and b

(Revenues) (Expenses)

a b

Revenues earned/Expenses incurred P 120,000 P 90,000

Accruals – beginning 23,000 12,000

- ending (40,000) (15,000)

Prepayments – beginning (22,000) (9,000)

- ending 8,000 11,000

Cash received/cash paid P 89,000 P 89,000

[Problem 19] Patz Company

Budgeted Income Statement

For The Second Quarter Ended, June 30, 20xx

Sales (P 500,000 + P 1,000,000) P 1,500,000

Less: Cost of goods sold 900,000

Gross profit 600,000

Less: Operating expenses:

Variable marketing P 150,000

Fixed marketing 50,000

Fixed administrative 40,000

Doubtful accounts (2% x 1.5 million) 30,000

Depreciation expense (P 800,000/20) 40,000 310,000

Net income P 290,000

[Problem 20] Mexia Inc.

For The Year Ended, December 31, 2007

Sales (P 9,000 x 110% x 105%) P 10,395

Less: Cost of goods sold (P 6,000 x 106% x 105%) 6,678

Gross profit 3,717

Less: Commercial expenses

Marketing P 780

Administrative (P 900 + P 420) 1,320 2,100

Operating income 1,617

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Income before income tax 1,447

Less: Income tax 579

Net income P 868

[Problem 21]

Easecom Company

For The Year Ended, December 31, 2007 (in thousands)

Sales:

Equipment (P 6,000 x 110% x 106%) P 6,996

Maintenance contracts (P 1,800 x 106%) 1,908 P 8,904 Less: Cost of goods sold (P 4,600 x 110% x 103%) 5,212

Gross profit 3,692

Less: Operating expenses:

Marketing (P 600 + P 250) 850 Administration 900 Distribution (P 150 x 110%) 165 Customer maintenance (P 1,000 + P 300) 1,300 3,215 Operating income P 477 [Problem 22] Mabuhay University Motor Pool Division Performance Report

For The Month of March 20xx

Actual Flexible Variance

Variable Costs Costs Budget UF (F)

Gasoline P 5,323.00 P 5,512.50 P (189.50)F

Oil, minor repairs, parts and supplies 380.00 378.00 2.00UF

Outside repairs 50.00 225.00 (175.00)F

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Fixed Cost

Insurance 525.00 500.00 25.00UF

Salaries and benefits 2,500.00 2,500.00 0.00

Depreciation 2,310.00 2,200.00 110.00UF

Sub-total 5,335.00 5,200.00 135.00UF

Totals P 11,088.00 P 11,315.50 P (227.50)F

Cost per mile (Costs + 63,000 miles) P 0.1760 P 0.1796 P (0.0036)F

(1)_{Gasoline = 63,000 x P1.40/16 = P 5,512.50}

Oil, etc., = 63,000 x P 0.006 = P 378

[Problem 23]

a. Triple-F Health Club Cash Budget

For The Year Ended October 31, 20C (in thousands)

Receipts:

Annual membership fees (P 355 x 110% x 103%) P 402.2

Lesson and class fee (P 234 x 234/180) 304.2

Miscellaneous (P 2 x 2/1.5) 2.7 P 708.9

Payments:

Manager’s salary and benefits (P 36 x 115%) 41.4

Regular employees wages and benefits (P 190 x 115%) 218.5

Lesson and class employee wages and benefits

(P 195 x 234/180 x 115%) 291.5

Travel and supplies (P 16 x 125%) 20.0

Utilities (P 22 x 125%) 27.5

Mortgage interest (P360 x 9%) 32.4

Miscellaneous (P2 x 125%) 2.5

Equipment payable 10.0

Accounts payable for supplies and utilities 2.5

Amortization of mortgage payable 30.0

Purchase of new equipment 25.0 701.3

Net cash inflows 7.6

Add: Cash balance - Oct. 31,20B 7.3

Cash balance - Oct. 31, 20C P 14.9

b. Problem(s) discloses by the prepared budget:

1. Incremental revenues are basically determined by the membership base, which may be considered relatively non-controllable.

2. The presence of the mortgage payable and its attendant interest expense fundamentally drain the cash position of the health club.

3. Possible areas for cost saving should be identified to compensate the accelerating trend in costs and expenses.

c. Joy Tan, the club general manager, is correct that the board’s goals to purchase the adjoining property in four or five years time is unrealistic. The adjoining property costs P300,000 and would be requiring in nominal terms P60,000 annual savings in the next five years. Considering that the recent net cash inflows from operations is

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only P7,600 in 20C, the required P60,000 annual savings would be extremely difficult for the business to achieve.