BKAM3023 Management Accounting II

Topic 2: Budget

Exercise 1

Centennial Corporation is preparing its cash payments budget for next month. The
following information pertains to the cash payments:

a. Centennial Corporation pays for 50% of its direct materials purchases in the
month of purchase and the remainder the following month. Last month’s direct
material purchases were $75,000, while the company anticipates $87,000 of
direct material purchases next month.

b. Direct labor for the upcoming month is budgeted to be $36,000 and will be paid
at the end of the upcoming month.

c. Manufacturing overhead is estimated to be 130% of direct labor cost each month

and is paid in the month in which it is incurred. This monthly estimate includes
$13,000 of depreciation on the plant and equipment.

d. Monthly operating expenses for next month are expected to be $41,000, which
includes $2,500 of depreciation on office equipment and $1,600 of bad debt
expense. These monthly operating expenses are paid during the month in which
they are incurred.

e. Centennial Corporation will be making an estimated tax payment of $7,800 next

month. How much cash will be paid out next month?

Exercise 2

Henderson Services, Inc., has $8,300 cash on hand on January 1. The company
requires a minimum cash balance of $7,300. January cash collections are $548,430.
Total cash payments for January are $575,160. Prepare a cash budget for January.
How much cash, if any, will Henderson need to borrow by the end of January?

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 BKAM3023 Management Accounting II

Exercise 3 (Past Year Exam Semester A191)

Lahwun Trading Sdn Bhd (LTSB) has compiled the following data in order to put
together its cash budget for the first quarter of year 2020:

January February March

Sales (units) 10,000 30,000 40,000

Additional information:
(i) The selling price for each unit is RM20. Based on past experience, 40 percent of
the total sales is on credit while the remaining sales are by cash.
(ii) Accounts receivable from credit sales is projected to be collected 40% in current
month; 50% in following month; and the remaining not collectable.
(iii) Inventory purchases costs are estimated to be 60% of sales. They are to be paid
30% in the month of purchase and the remaining 70% in the following month.
(iv) LTSB employs five workers who are paid monthly RM20,000 in total.
(v) Rental and marketing expenses are paid monthly RM35,000.
(vi) Other administrative expenses are RM48,000 (including depreciation of
RM10,000).
(vii) The beginning balance of selected accounts are as follows:
Cash RM28,500
Accounts receivable RM35,000
Accounts payable RM55,000

REQUIRED:

(a) Prepare a cash budget for January, February, and March of year 2020.

(b) Briefly explain how a business can benefit from cash budget.