Cash Flow Budget

CASH FLOW BUDGET
9-2
Planning and Control
 Planning --  Control --
involves involves the steps
developing taken by
objectives and management that
preparing various attempt to ensure
budgets to the objectives are
achieve these attained.
objectives.
© McGraw-Hill Ryerson Limited., 2004

9-3
Advantages of Budgeting
Define goal
and objectives
Communicating Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks

9-4
The Master Budget

Sales
Budget
Ending Selling and

Production
Inventory Administrative
Budget
Budget Budget
Direct Direct Manufacturing

Materials Labour Overhead
Budget Budget Budget
Cash
Budget
Budgeted Financial Statements © McGraw-Hill Ryerson Limited., 2004

9-5
The Sales Budget

Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
Defines cash inflow expectations

9-6
Budgeting Example
 Royal Company is preparing budgets for the
quarter ending June 30.
 Budgeted sales for the next five months are:
 April 20,000 units
 May 50,000 units
 June 30,000 units
 July 25,000 units
 August 15,000 units.
 The selling price is $10 per unit.
9-7
The Sales Budget
April May June Quarter

Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling price
per unit
Total sales

9-8
The Sales Budget

Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling price
per unit $ 10 $ 10 $ 10 $ 10
Total sales $200,000 $500,000 $300,000 $1,000,000

9-9
Expected Cash Collections
 All
 All sales
sales are
are on
on account.
account.
 Royal’s
 Royal’s collection
collection pattern
pattern is:is:
 70%
70% collected
collected in
in the
the month
month ofof sale,
sale,
 25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
 5%
5% is
is uncollectible.
uncollectible. (take
(take careful
careful note
note of
of treatment
treatment
no
no cash
cash expected
expected to to be
be collected
collected –– no
no inflow)
inflow)
 The
 The March
March 31 31 accounts
accounts receivable
receivable balance
balance ofof
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
 Note
 Note any
any “cash
“cash sales”
sales” would
would result
result in
in
immediate
immediate cash
cash inflow
inflow at
at the
the time
time of
of sale
sale

9-10

9-11
From
From sales
sales
budget
budget

9-12

9-13

9-14
The Production Budget
 Royal Company wants ending inventory

to be equal to 20% of the following
month’s budgeted sales in units.
 On March 31, 4,000 units were on hand.
 Let’s prepare the production budget.

9-15
The Direct Materials Budget

Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add desired
ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less beginning
inventory 13,000 23,000 14,500 13,000
Materials to be
purchased 140,000 221,500 142,000 503,500

9-16
Expected Cash Disbursement for Materials
 Royal
 Royal pays
pays $0.40
$0.40 per
per kilogram
kilogram for
for its
its
materials.
materials.
 One-half
 One-half of
of aa month’s
month’s purchases
purchases are
are paid
paid
for
for in
in the
the month
month of of purchase;
purchase; the
the other
other
half
half is
is paid
paid in
in the
the following
following month.
month.
 The
 The March
March 31
31 accounts
accounts payable
payable balance
balance
is
is $12,000.
$12,000.
 Let’s
Let’s calculate
calculate expected
expected cash
cash
disbursements.
disbursements.
9-17

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
May purchases
June purchases
Total cash
disbursements

9-18

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
June purchases
Total cash
disbursements $ 40,000
140,000 kgs. × $.40/kg. = $56,000

9-19

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
Total cash
disbursements $ 40,000 $ 72,300

9-20

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
50% x $56,800 28,400 28,400
Total cash
disbursements $ 40,000 $ 72,300 $ 72,700 $185,000

9-21
The Direct Labour Budget

 At
 At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours of
of
direct
direct labour.
labour.
 The
 The Company
Company has has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours ofof work
work each
each week
week minimum.
minimum.
 In
 In exchange
exchange for for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agreed
agreed to
to
aa wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of of the
the hours
hours
worked
worked (No(No overtime
overtime paypay premium).
premium).
 For
 For the
the next
next three
three months,
months, thethe direct
direct labour
labour workforce
workforce
will
will be
be paid
paid for
for aa minimum
minimum of of 1,500
1,500 hours
hours perper month.
month.
 Let’s
Let’s prepare
prepare the
the direct
direct labour
labour budget.
budget.

9-22
From production
budget

9-23

9-24
Higher
Higher ofof labour
labour hours
hours required
required
or
or labour
labour hours
hours guaranteed.
guaranteed.
9-25

9-26
Manufacturing Overhead Budget
 Royal Company uses a variable

manufacturing overhead rate of $1 per unit
produced.
produced
 Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of non-cash
costs (primarily depreciation of plant assets).
 Let’s prepare the manufacturing

overhead budget.
9-27

Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate $ 1 $ 1 $ 1 $ 1
Variable mfg. OH costs $ 26,000 $ 46,000 $ 29,000 $ 101,000
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs
Cash disbursements
for manufacturing OH
From production
budget

9-28

Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Less noncash costs
Cash disbursements
for manufacturing OH

9-29

Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Less noncash costs 20,000 20,000 20,000 60,000
Cash disbursements
for manufacturing OH $ 56,000 $ 76,000 $ 59,000 $ 191,000
Depreciation
Depreciation is
is aa non-cash
non-cash charge.
charge.
9-30
Selling and Administrative Expense Budget
 At
 At Royal,
Royal, variable
variable selling
selling and
and administrative
administrative
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
 Fixed
 Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
$70,000
$70,000 per
per month.
month.
 The
 The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
include
include $10,000
$10,000 in
in costs
costs –– primarily
primarily depreciation
depreciation ––
that
that are
are not
not cash
cash outflows
outflows ofof the
the current
current month.
month.
Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and
administrative
administrative expense
expense budget.
budget.

9-31

Budgeted sales 20,000 50,000 30,000 100,000
Variable selling
and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $10,000 $25,000 $15,000 $ 50,000
Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less noncash
expenses
Cash disburse-
ments for
selling & admin.

9-32

Budgeted sales 20,000 50,000 30,000 100,000
Variable selling
and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $10,000 $25,000 $15,000 $ 50,000
Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less noncash
expenses 10,000 10,000 10,000 30,000
Cash disburse-
ments for
selling & admin. $70,000 $85,000 $75,000 $230,000

9-33
The Cash Budget

Royal:
 Maintains
 Maintains aa 16%
16% open
open line-of-credit
line-of-credit for
for $75,000.
$75,000.
 Maintains
 Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
 Borrows
 Borrows on
on the
the first
first day
day of
of the
the month
month and
and repays
repays
loans
loans on
on the
the last
last day
day of
of the
the month.
month.
 Pays
 Pays aa cash
cash dividend
dividend of
of $49,000
$49,000 in
in April.
April.
 Purchases
 Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
 Has
 Has an
an April
April 11 cash
cash balance
balance ofof $40,000.
$40,000.
9-34
The Cash Budget

Beginning cash balance$ 40,000
Add cash collections 170,000
Total cash available 210,000
Less disbursements
Materials 40,000
Direct labour
Mfg. overhead
Selling and admin.
Equipment purchase Schedule
Schedule of
of Expected
Expected
Dividends Cash
Cash Disbursements
Disbursements
Total disbursements
Excess (deficiency) of
cash available over Schedule
Schedule of
of Expected
Expected
disbursements Cash
Cash Collections
Collections

9-35
The Cash Budget

Beginning cash balance $ 40,000
Add cash collections 170,000 Direct Labour
Total cash available 210,000 Budget
Less disbursements
Materials 40,000
Direct labour 15,000
Mfg. overhead 56,000
Manufacturing
Selling and admin. 70,000 Overhead Budget
Equipment purchase
Dividends
Total disbursements
Selling and Administrative
cash available over
disbursements Expense Budget

9-36
The Cash Budget

Beginning cash balance $ 40,000
Add cash collections 170,000
Total cash available 210,000
Less disbursements
Materials 40,000 Because Royal maintains
Direct labour 15,000 a cash balance of $30,000,
Mfg. overhead 56,000 the company must
Selling and admin. 70,000 borrow on its
Equipment purchase -
Dividends 49,000
line-of-credit.
Total disbursements 230,000
cash available over
disbursements $ (20,000)

9-37
Financing and Repayment

Excess (deficiency)
of Cash available
over disbursements $ (20,000)
Financing:
Borrowing 50,000
Repayments -
Interest -
Total financing 50,000
Ending cash balance $ 30,000 $ 30,000 $ - $ -
Ending cash balance for April

is the beginning May balance.

9-38
The Cash Budget

Beginning cash balance $ 40,000 $ 30,000
Add cash collections 170,000 400,000
Total cash available 210,000 430,000
Less disbursements
Materials 40,000 72,300
Direct labour 15,000 23,000
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000
Equipment purchase - 143,700
Dividends 49,000 -
Total disbursements 230,000 400,000
cash available over
disbursements $ (20,000) $ 30,000

9-39

Excess (deficiency)
of Cash available
over disbursements $ (20,000) $ 30,000
Financing:
Borrowing 50,000 -
Repayments - -
Interest - -
Total financing 50,000 -
Ending cash balance $ 30,000 $ 30,000
Because the ending cash balance is

exactly $30,000, Royal will not repay
the loan this month.

9-40
The Cash Budget

Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000

9-41
The Cash Budget

Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
At the end of June, Royal
At the end of- June,143,700
Equipment purchase
has enough
Royal has48,300 cash
enough192,000
cash
Dividends to to repay
repay the $50,000
$50,000 loan
the49,000 - plus
loan plus interest
interest
- at 16%.
at49,000
16%.
Total disbursements 230,000 400,000 270,000 900,000
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000

9-42

Excess (deficiency)
of Cash available
over disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
Financing:
Borrowing 50,000 - - 50,000
Repayments - - (50,000) (50,000)
Interest - - (2,000) (2,000)
Total financing 50,000 - (52,000) (2,000)
Ending cash balance $ 30,000 $ 30,000 $ 43,000 $ 43,000
$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment of June 30.

Cash Flow Budget

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CASH FLOW BUDGET

Planning and Control

© McGraw-Hill Ryerson Limited., 2004

© McGraw-Hill Ryerson Limited., 2004

The Master Budget

Ending Selling and

Direct Direct Manufacturing

Budgeted Financial Statements © McGraw-Hill Ryerson Limited., 2004

The Sales Budget

© McGraw-Hill Ryerson Limited., 2004

The Sales Budget

April May June Quarter

© McGraw-Hill Ryerson Limited., 2004

The Sales Budget

April May June Quarter

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Collections

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Collections

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Collections

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Collections

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Collections

© McGraw-Hill Ryerson Limited., 2004

The Production Budget

 Royal Company wants ending inventory

 On March 31, 4,000 units were on hand.

 Let’s prepare the production budget.

© McGraw-Hill Ryerson Limited., 2004

The Direct Materials Budget

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Disbursement for Materials

Expected Cash Disbursement for Materials

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Disbursement for Materials

140,000 kgs. × $.40/kg. = $56,000

Expected Cash Disbursement for Materials

© McGraw-Hill Ryerson Limited., 2004

Expected Cash Disbursement for Materials

© McGraw-Hill Ryerson Limited., 2004

The Direct Labour Budget

© McGraw-Hill Ryerson Limited., 2004

The Direct Labour Budget

© McGraw-Hill Ryerson Limited., 2004

The Direct Labour Budget

© McGraw-Hill Ryerson Limited., 2004

The Direct Labour Budget

The Direct Labour Budget

© McGraw-Hill Ryerson Limited., 2004

Manufacturing Overhead Budget

 Royal Company uses a variable

 Let’s prepare the manufacturing

Manufacturing Overhead Budget

April May June Quarter

© McGraw-Hill Ryerson Limited., 2004

Manufacturing Overhead Budget

April May June Quarter

© McGraw-Hill Ryerson Limited., 2004

Manufacturing Overhead Budget

April May June Quarter

Selling and Administrative Expense Budget