STRAIGHT PROBLEMS

1. Basic operating budgets. Paniqui Company is in the process of preparing its operating budgets for 2014. The company produces and sells only one product, Healthy Kick. The following data are taken from its statement of assumptions:

1. Sales and collections.

The product is currently sold at a unit price of P150 and is not expected to change in 2014. The following estimates are developed by the Market Research Department as probable sales in January 2014:

Unit sales Probability

40,000 .30

50,000 .50

60,000 .20

Sales in the succeeding months are expected to increase by 10% from each month thereafter, except for the month of April which is expected to increase by 20% from the immediately preceding month.

Eighty percent (80%) of sales is to be made on credit with terms of 2/10, n/40. Billings are made on the date of sales and collections are made as follows:

40% in the month of sales with 55% paying within the discount period

50% in the first month after sale

5% in the second month after sale

5% uncollectible

The accounts receivable balance on December 31, 2013 is expected to be P10,000,000, with 18% and 7% of it is coming from the November 2013 and October 2013 sales, respectively.

2. Production. The finished goods inventory at the end is each month is set at 80% of the next months sales.
3. Materials. A unit of product Healthy Kick needs 4 lbs. of material X costing P5 per pound. Materials inventory at the end of the each month is estimated to be 60% of the next months needs plus 12,000 lbs. Payments to materials suppliers are 60% in the month of purchase and 40% in the following month of purchase. The accounts payable balance on December 31, 2013 is estimated to be P600,000.
4. Labor. It takes 2 hours to produce a unit of product Healthy Kick. On the average, production workers are paid at a rate of P40 per hour. Payroll costs amounting to 10% of the total payroll cost per month are estimated to be paid next month.
5. Factory overhead. The standard variable factory overhead rate is P5 per hour. Total budgeted fixed overhead is budgeted at P6 million to be incurred evenly during the year. The companys normal capacity is 50,000 units per month.

6. Other information. Expenditures and other data are also assembled and presented below:

	December	January	February	March
Cash balance, beginning		P 135,000	P ?	P ?
Paid employee benefits		1,000,000	1,000,000	1,000,000
Other cash marketing and administrative expenses		500,000	500,000	500,000
Prepaid expenses	120,000	220,000	150,000	90,000
Accrued expenses	32,000	45,000	60,000	75,000
Machineries and equipment, on cash		2,000,000	-	-
Dividends paid		-	-	500,000
Depreciation expense	200,000	200,000	200,000	200,000

g. Financing. The company can borrow at a multiple of P10,000 with an interest of 3% per month. All borrowings will take place at the beginning of the month. The company maintains a minimum cash balance of P100,000.

Required: Operating and financial budgets, together with supporting schedules, for the months of January, February, and March 2014:

1. Sales in units and in pesos, net of discounts and allowance for doubtful accounts.
2. Collections from customers.
3. Production.
4. Materials purchases in units and in pesos.
5. Payments to materials suppliers.
6. Direct labor.
7. Factory overhead.
8. Total production costs.
9. Cost of goods sold.
10. Operating expenses incurred.
11. Income statement.
12. Cash budget.