CHAPTER ONE Cost & Management Accounting Handout

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Master Budget
Budget is a formal business plan. A budget is a tool that helps managers in both their planning and control
functions. Interestingly, budget helps managers with their control function not only by looking forward
but also by looking backward. Budget deal with what managers’ are planning for the future. Budget can
be used as a benchmark that allows managers to compare actual performance with estimated or desired
performance.
The three major benefit of budgeting are as follows
1. Budgeting compels managers to think a head by formalizing their responsibility for planning
2. Budgeting provide definite expectations that are the best framework for judging subsequent
performance
3. Budgeting aids managers in coordinating their effort, so that the plans of an organizations sub
unit meet the objective of the organization as a whole.
A master budget is a comprehensive expression of managements operating and financial budget for future
time period usually for a year. A master budget summarizes the planned activities of all sub units of an
organization – sales, production, distribution and finance

Components of Master Budget:

As explained earlier, the master budget is the principal output of a budgeting system that shows a
comprehensive operating and financial plans of management. This budget ties together all phases of an
organization’s operations and is comprised of many separate budgets and schedules that are
interdependent. The terms used to describe assorted budget schedules vary from organization to
organization, though most master budgets have common elements. The usual master budget for a non-
manufacturing company, for instance, merchandising firm has the following components:

1. Operating Budget
(a) Sales budget (and other cost-driver budgets as necessary)
(b) Purchases budget
(c) Cost of goods sold budget
(d) Operating expenses budget
(e) Budgeted income statement
2. Financial Budget
(a) Capital budget
(b) Cash budget
(c) Budgeted balance sheet

1.1. Operating Budget

The operating budget focuses on the income statement and its supporting schedules. Although the
operating budget is sometimes called the profit plan, an operating budget may show a budgeted loss, or
even be used to budget expenses in an organization or agency with no sales revenue. The budgeting
process normally begins with the preparation of the operating budgets. An operating budget is prepared
by individual sections within a company and becomes part of the company’s master budget. The number
of operating budgets depends on the nature of the business entity. For instance, some operating budgets
prepared for manufacturing companies may not be required for merchandising concerns.
1.1.1. Sales Budget
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The sales budget is the starting point for budgeting because the inventory levels, purchases, and operating
expenses are geared to the rate of sales activities and other cost drivers. A sales budget is a detailed
schedule showing the expected sales for the budget period. The sales budget typically is expressed in both
sales birr and units of product. An accurate sales budget is the key to the entire budgeting process. All of
the other parts of the master budget are dependent on the sales budget in some way. Thus, if the sales
budget is done sloppily or messily, then the rest of the budgeting process is largely a waste of time. The
sales budget for a hypothetical company used in this Duty called ABC Company appears in table below
shows the total budgeted sales and the composition of cash and credit sales respectively.

ABC Company
Sales Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Budgeted cash sales Birr XX Birr XX Birr XX XXXX
Budgeted credit sales Birr XX Birr XX Birr XX Birr X
Total Budgeted sales Birr XXXX Birr XXXX Birr XXXX Birr XXXX

Notice that, to prepare the sales budget, budgeted cash sales and budgeted credit sales information of the
original data are used and that this information can be obtained from the marketing department or any
other sales forecast related units.

1.1.2. Cash Collection Budget

The schedule of expected cash collection is prepared at the same time of preparing the sales budget. Thus,
after the sales budget is prepared, the schedule of expected cash collections is prepared to show how
much cash is expected to be received from customers. The cash collections include to current month’s
cash sales plus the previous month’s credit sales expected to be collected in the current month. In brief,
the cash collections consist of collections on sales made to customers in prior periods plus collections on
sales made in the current budget period. To prepare this schedule, you have to look at the sales budget
prepared above and the data given in the illustration on the mode of collecting credit sale. The schedule of
expected cash collections for ABC Company appears in table below, which will be later needed to
prepare the cash budget.

ABC Company
Cash Collection Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Accounts Receivable-beginning balance Birr XX - - Birr XX
January sales Birr XX Birr XX - Birr XX
February sales - Birr XX Birr XX Birr XX
March sales - - Birr XX Birr XX
Total expected cash collections Birr XXX Birr XXX Birr XXX Birr XXX

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1.1.3.Purchases Budget
This budget is prepared to show the amount of goods to be purchased from suppliers during the period.
Merchandising firms would prepare an inventory purchases budget for each item carried in stock. Some
large retail organizations make such computations on a frequent basis to ensure that adequate stocks are
on hand to meet customer needs. In brief, after the sales budget is prepared, the inventory purchases
budget is prepared to show the amount of inventory that will be needed to satisfy the amount of projected
sales. Meeting the sales demand requires having enough inventories to cover expected sales and future
sales between reorder points. Accordingly, the total amount of inventory needed for each month equals
the amount needed to fulfill budgeted sales demand plus the desired ending inventory. The total amount
of inventory needed can be obtained from two sources. These are the company can use existing stock, or
simply beginning inventory, and the company’s planned purchases. The schedule of inventory purchases
for ABC Company appears in table below.

ABC Company
Inventory Purchases Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Budgeted costs of goods sold Birr XX Birr XX Birr XX Birr XX
Add: Desired ending inventory Birr XX Birr XX Birr XX Birr XX
Total inventory needed Birr XX Birr XX Birr XX Birr XX
Less: Beginning inventory Birr XX Birr XX Birr XX Birr XX
Required purchases Birr XXXX Birr XXXX Birr XXXX Birr XXXX

1.1.4.Disbursement For Purchase Budget

This schedule is based on the purchases budget. This schedule is later needed to prepare the overall
cash budget. Disbursements for inventory purchases consist of payments for purchases on account
made in prior periods plus any payment for inventory purchases made in the current budget period. The
schedule of expected disbursements for purchases for ABC Company appears in table below.
ABC Company
Expected Cash Disbursements for Purchases Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Accounts payable-beginning balance Birr XX - - Birr XX
January purchases Birr XX Birr XX - Birr XX
February purchases - Birr XX Birr XX Birr XX
March purchases - - Birr XX Birr XX
Total disbursements for purchases Birr XXXX Birr XXXX Birr XXXX Birr XXXX

1.1.5. Operating Expenses Budget

This budget lists the budgeted operating expenses for the budget period. All budgeted selling and
administrative expenses would be compiled and listed down. In large organizations, this budget would be
a compilation of many smaller, individual budgets submitted by department heads and other persons

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responsible for selling and administrative expenses. For example, the marketing manager in a large
organization would submit a budget detailing the advertising expenses for each budget period.
The budgeting of operating expenses depends on various factors. Month-to-month fluctuations in sales
volume and other cost-driver activities directly influence many operating expenses. Examples of expenses
driven by sales volume include sales commissions and many delivery expenses. Other expenses are not
influenced by sales or other cost-driver activity, and such expenses include rent, insurance, depreciation,
and salaries within appropriate relevant ranges and are regarded as fixed. The operating expenses budget
does not contain a provision for interest expense, because the amount of interest expense cannot be
determined until the amount of expected borrowing has been established through the preparation of the
cash budget. Accordingly, the interest component will be determined at a later point in the budgeting
process. The operating expense budget, in any case, will be later needed to prepare the budgeted income
statement. The schedule of operating expense budget for ABC Company appears in table below.

ABC Company
Operating Expense Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Salaries and wages Birr XX Birr XX Birr XX Birr XX
Advertising Birr XX Birr XX Birr XX Birr XX
Shipping Birr XX Birr XX Birr XX Birr XX
Depreciation Birr XX Birr XX Birr XX Birr XX
Other expenses Birr XX Birr XX Birr XX Birr XX
Total budgeted operating expenses Birr XXXX Birr XXXX Birr XXXX Birr XXXX
1.1.6. Disbursements For Operating Expenses Budget
This schedule is based on the operating expenses budget. For example, if the information available states
that cash expenses are paid as incurred it means that all cash expenses incurred in first month will be paid
in that month, and so on. In practice, differences between expense recognition and cash flow are present
because of several conditions. Thus, expenses recognized in one period may not affect the cash flow of
that period if they will be paid in later periods. Notice that depreciation expense is not included in the
cash disbursements for operating expenses, because depreciation is a non-cash expense. Cash outflow for
investments in plant assets is shown as an investing activity at the time cash is paid to purchase plant
assets. At this time, the investing activity will be shown on a separate line on the cash budget. At later
times, depreciation is recognized as an expense by rationally and systematically allocating the cost of
plant assets over their useful life. Such an allocation, however, does not represent an expense that calls for
the payment of cash. The schedule of expected cash disbursements for operating expenses for ABC
Company appears in table below.

ABC Company
Cash Disbursements for Operating Expense Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Salaries and wages Birr XX Birr XX Birr XX Birr XX
Advertising Birr XX Birr XX Birr XX Birr XX
Shipping Birr XX Birr XX Birr XX Birr XX

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Other expenses Birr XX Birr XX Birr XX Birr XX

Disbursements for operating expenses Birr XXXX Birr XXXX Birr XXXX Birr XXXX

Notice from the operating expense disbursement schedule that depreciation expense is excluded for
reasons explained earlier. This schedule will later be needed when the cash budget is prepared.
1.1.7. Budgeted Income Statement
The budgeted income statement from operations can be prepared from the data developed in all tables
shown above. The budgeted income statement is one of the key schedules in the budget process. It shows
the company’s planned profit for the upcoming budget period, and it stands as a benchmark against which
subsequent company performance can be measured. The income statement will be complete after addition
of the interest expense, which is computed after the cash budget, has been prepared.
If expected profitability is unsatisfactory, management may take actions, including abandoning the
project for which the budget is prepared or altering planned activity. Management perhaps may convince
employees to accept lower pay or take actions to reduce the number of employees, which is of course is
not a corrective action. Likewise, the pricing strategy could be scrutinized or examined for possible
changes. Indeed, budgets are usually prepared on spreadsheets or computerized mathematical models that
enable managers to easily perform “what-if” analysis. Managers change some variables on the
spreadsheet, and the software instantly presents revised set of budgets. Although computer technology
can provide instant access to a wide array of budgeted data, the manager remains responsible for data
analysis and decision-making. The proper interpretation of budgeted data requires an understanding of the
origins and limitations of the budget amounts. For this reason, you are advised to retrace the data in the
budgeted income statement, and other Performa financial statements for that matter, back to the source
data.
The budgeted income statement for ABC Company appears in table below, which is referenced by the
source data for its preparation. Notice that income taxes are ignored in this illustration.

ABC Company
Budgeted Income Statement
For the Quarter Ended December 31, 20XX
Sales Birr XX
Less cost of goods sold Birr XX
Gross margin Birr XX
Less operating expenses:
Salaries and wages Birr XX
Advertising Birr XX
Shipping Birr XX
Depreciation Birr XX
Other expenses Birr XX
Total operating expenses Birr XX
Net operating income Birr XX
Less interest expense Birr XX
Net income Birr XX

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The interest expense will be computed later when the cash budget is prepared. The main reason why the
budgeted income statement is prepared before the cash budget is to show that the ultimate output of the
operating budgets is Performa or budgeted income statement.
Steps in preparing an operating budget for Manufacturing Companies
Step1. Revenue budget:
It is the usual starting point for budgeting, because production and hence costs and inventor level
generally depend on the forecasted level of revenue.
Budgeted Revenue = Budgeted quantity x unit selling price
Step2. Production Budget (unit):
After revenue is budgeted, the production budget can be prepared. The total finished goods units to be
produced depend on planned sales and expected changes in inventory level.
Budgeted Production (unit) = Budgeted sales + Target ending FG – Beginning FG
Inventory (unit) Inventory (unit)
Step3. Direct Material Purchase& Usage Budget
The decision on the number of units to be produced is the key to computing the usage of direct material in
quantities and currency.
3.1 Direct Material Usage Budget in Units and Currency
Direct Material = Budgeted production X Quantity of material required per unit
Usage Budget (unit)
Direct Material Usage in Currency = quantity of material used X rate per unit
3.2 Direct Material Purchase Budget
DMPB (unit) = Production Usage + Target EI of Material in Unit – Beginning Inventory of RM
in Units
DMPB in Currency= purchase quantity X rate per unit
Step4. Direct Manufacturing Labour Budget
These costs depends on wage rates, production methods and hiring plans
 Budgeted Labour Hours = budgeted Production X Time Required per Unit
 Budgeted Labour Cost = Budgeted Labour Hours X Labour Cost per Unit
Step5. Manufacturing overhead budget:
The total of these costs depends on hours individual over head costs vary with the assumed cost driver,
direct manufacturing labour hours
Step6. Ending inventory budget
RM ending Budget = Unit cost of RM X Quantity of Ending Inventory
FG good Ending inventory = Unit Cost of Production X Quantity of Ending Inventory
Step7. Cost of good sold budget
Beginning FG inventory XXX
Beginning work in process XX
Direct Material used XX
Direct Manufacturing Labour XX
Total Work in Process Inventory XX
Less: Ending Work in Process XX
Cost of goods manufactured XX
Cost of Goods Available for Sale XXX
Less: Ending Finished Good Inventory XX
Cost of Good Sold XXX
Step8. Budgeted Income Statement
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Revenue XXX
Less Cost of Goods Sold (XX)
Gross Margin XXX
Less: Operating Costs
Research & Development Costs XX
Marketing Costs XX
Distribution Costs XX
Customer service Cost XX
Administrative Costs XX XX
Operating Income XXX
Illustration example
RAM Engineering is a machine shop that uses skilled labour and Metal alloy to manufacture two types of
air craft replacement parts Regular & Heavy duty. After carefully examining relevant factors, the
executive of RAM Engineering forecasts the following figures for 2006. You are now expected to
prepare the budgeted income statement for RAM engineering. Assume that work in process inventory is
zero, units costs of direct material purchased & finished goods sold is remain unchanged though out the
budgeted year and variable production costs are variable with respect to direct manufacturing labour
hours.
Direct Material
Material 111 alloy $7perKG
Material 112alloy $10perKg
Direct manufacturing labour $20perKg
Product
Content of each product unit Regular Heavy duty
Direct material 111alloy 12kgs 12kgs
Direct material 112 alloy 6kgs 8 kgs
Direct manufacturing labour 4hours 6hours

All direct manufacturing costs are variable with respect to the unit of out produced, additional
information regarding the year 2006 is as follows:
Product
Regular Heavy duty
Expected sales in units 5000 1000
Selling price per unit $600 $800
Target ending inventory in unit 1,100 50
Beg. Inventory in units 100 50
Beg. Inventory in dollars $38,400 $26,200
Direct Material
111 alloy 112alloy
Beg. Inventory in kgs 7,000 6000
Target ending inventory in Kg 8000 2000

Budgeted Manufacturing Overhead Cost

Variable Cost $780,000
Fixed Cost $420,000
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Total Manufacturing Cost $1,200,000

Other (Non- Manufacturing) Cost
Variable Cost $475,000
Fixed Cost $395,000
Total $870,000
1.2. Financial Budget
The second major part of the master budget is the financial budget, which consists of the capital budget,
cash budget, budgeted balance sheet, & budgeted statement of cash flows. The capital expenditure
budget or capital budget is a very important budget as it throws light on a firm’s outlay and expansion and
diversification program. This budget may not be restricted to a single year and may be prepared to cover a
long period of years. While preparing this budget, factors such as sales potential for the increased
production, possibility of price reduction, and increased selling and administrative costs are to be
considered. The capital expenditure budget enables a firm to establish a system of priorities, and serves as
a tool for controlling expenditure. It also facilitates cost reduction program particularly when
modernization and renovation is covered by this budget. However, the capital expenditure budget will not
be discussed in this section. This section, therefore, focuses on the cash budget, budgeted balance sheet,
and budgeted statement of cash flows. The financial budget focuses on the effects that the operating
budget and other plans (such as capital budgeting and repayment of debt) will have on cash. The financial
budget consists of the capital budget, cash budget, budgeted balance sheet, and budgeted statement of
cash flows.
1.2.1.Capital Budget
The capital budget is prepared for additions to property and equipment. This budget is used to describe a
company’s long-term plans regarding investment in facilities, equipment, new products, store outlets, and
lines of business.
1.2.2.Cash Budget
The cash budget is used, as you shall see later in this section, to ensure that cash will be available
throughout the budget year. Once the operating budgets have been established, the cash budget and other
financial budgets can be prepared. A cash budget is a detailed plan showing how cash resources will be
acquired and used over some specified time period. All of the operating budgets have an impact on the
cash budget. In the case of the sales budget, the impact comes from planned cash receipts to be collected
from sales to customers. In the case of the other budgets, the impact comes from the planned cash
expenditures within the budgets themselves.
The cash budget is a statement of planned cash receipts and disbursements and pulls together much of the
data developed in the preceding steps. Most of the raw data needed to prepare the cash budget are
included in the cash receipts and disbursements schedules that were discussed earlier. However, further
refinements of these data are sometimes necessary. The cash budget is composed of four major sections
listed below:
1. The Receipts Section. This section consists of a listing of all of the cash inflows, except for
financing, expected during the budget period. Generally, the major source of receipts will be from
sales.
2. The Disbursements Section. This section consists of all cash payments that are planned for the
budget period. These payments will include raw materials purchases, direct labor payments,
manufacturing overhead costs, operating expenses, and so on, as contained in their respective
budgets. In addition, other cash disbursements such as equipment purchases, dividends, and other
cash withdrawals by owners are listed. This is additional information that does not appear on any of
the earlier schedules.
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3. The Cash Excess or Deficiency Section. The cash excess or deficiency is computed as follows:
Cash Balance, Beginning Birr XX
Add Cash Received Birr XX
Total cash available before financing Birr XX
Less disbursement Birr XX
Excess (deficiency) of cash Birr XX

If there is a cash deficiency during any budget period, the company will need to borrow funds. If there is
cash excess during any budget period, funds borrowed in previous periods can be repair or the idle funds
can be placed in short-term or other investments.
4. The Financing Section. This section provides a detailed account of the borrowings and
repayments projected to take place during the budget period. It also includes a detail of interest
payments that will be due on money borrowed.
The following points are worth mentioning about the cash budget shown for ABC Company in table
below:
(a) Cash balance, beginning. It is taken from the original information given or available, that is, a
cash balance on December 31, 20XX in the case of ABC Company. Thus, remember that the
ending cash balance of December becomes the beginning cash balance of January. Moreover, the
beginning cash balance for the quarter means the same as the beginning cash balance for
January. This is so because the quarter begins on January 1.
(b) Collections from customers. The collections from customers are brought from the schedule of
expected cash collections.
(c) Purchases of inventory. The figures for purchases of inventory are taken from the schedule of
expected cash disbursements for purchases.
(d) Operating expenses. The figures for operating expenses are taken from the schedule of expected
cash disbursements for operating expenses.
(e) Purchases of equipment and cash dividends. While the figures for purchases of equipment are
taken from information given or available and the figure for cash dividends.
(f) Financing.

ABC Company
Cash Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Cash balance, beginning Birr XX - - Birr XX
Add Cash Received
Collection from customers Birr XX Birr XX Birr XX Birr XX

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Total cash available [a] Birr XX Birr XX Birr XX Birr XX

Less disbursements:
Purchases of inventory Birr XX Birr XX Birr XX Birr XX
Operating expenses Birr XX Birr XX Birr XX Birr XX
Purchases of equipment - Birr XX Birr XX Birr XX
Cash dividends Birr XX - - Birr XX
Total disbursements [b] Birr XX Birr XX Birr XX Birr XX
Excess (deficiency) of cash [c] = [a] +
Birr XX Birr XX Birr XX Birr XX
[b]
Financing:
Borrowings (at beginning) Birr XX - - Birr XX
Repayments (at ending) - - Birr XX Birr XX
Interest - - Birr XX Birr XX
Total financing [d] Birr XX - Birr XX Birr XX
Cash balance, ending [e] = [c] + [d] Birr XXXX Birr XXXX Birr XXXX Birr XXXX

1.2.3.Budgeted Balance Sheet

Financial budgets are concerned with the inflows and outflow of cash, which may be detailed in cash
budget and showing expected financial position at the end of the budget period in a proforma or
budgeted balance sheet. The preparation of the operating budget should precede the preparation of the
financial budget because many of the financing activities are not known until the operating budgets are
known.
The budgeted or proforma balance sheet projects each balance sheet item in accordance with the business
plan as expressed in the previous schedules. To construct the budgeted balance sheet, we start with the
general ledger account balances as of December 31,20XX given or available data in the case of ABC
Company and adjust each balance sheet account balance for the changes expected to take place during
20XX. The budgeted balance sheet for ABC Company is shown in table below.

ABC Company
Budgeted Balance Sheet
December 31, 20XX
Assets
Current assets:
Cash Birr XX
Accounts receivable Birr XX
Inventory Birr XX
Total current assets Birr XX
Plant assets:
Building and equipment (net) Birr XX
Total Assets Birr XX
Liabilities and Stockholders’ Equity

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Current liabilities:
Accounts payable Birr XX
Stockholders’ equity:
Capital stock Birr XX
Retained earnings Birr XX
Total stockholders’ equity Birr XX
Total Liabilities and Stockholders’ Equity Birr XXX

Carefully observe the following explanations about the figures contained in the budgeted balance sheet
shown in table above.
(a) Cash: The figure for cash is brought from the cash budget prepared before and shows the ending
cash balance for the month of March or for the quarter in general.
(b) Accounts Receivable: The figure for accounts receivable represents the credit sales expected to
be made in March. You are encouraged to look back at the explanation given below the schedule
of expected cash collections that appears in schedule.
(c) Inventory: The figure for inventory is brought from the inventory purchases budget in schedule
1(c) and shows the desired ending inventory for the month of March or for the quarter in general.
(d) Plant assets (net): The figure for plant assets (net) is computed from the acquisition cost of the
plant assets and its accumulated depreciation.
(e) Accounts payable: The figure for accounts payable represents the amount of the inventory
purchases and other items acquired on account in March. You are encouraged to look back at the
explanation given below the schedule of expected cash disbursements for inventory purchases.
(f) Capital stock: The figure for capital stock is taken as it is directly from information given on the
general ledger account balances as of the date of incorporation and any other paid in capital in
excess of par value.
(g) Retained earnings: The figure for retained earnings is computed projected retained earnings and
adding it to the net income projected and deducting the dividends to paid.
Example 1:
To illustrate the budget process for merchandising firms, a hypothetical office supplies specialty store in
Addis Ababa called ANC Company will be considered. The company prepares its master budget on a
quarterly basis. The following data have been assembled to assist in the preparation of the master budget
for the first quarter of 2005:
(a) As of December 31, 2004, the company’s general ledger showed the following account balances:
Debit Credit
Cash Birr 48,000
Accounts receivable 224,000
Inventory 60,000
Building and equipment (net) 370,000
Accounts payable Birr 93,000
Capital stock 500,000
Retained earnings 109,000
Total Birr 702,000 Birr 702,000

(b) Actual sales for December 2004 and budgeted sales for the next four months of 2005 are as follows:
December (actual) Birr 280,000
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Budgeted sales of 2005:

January 400,000
February 600,000
March 300,000
April 200,000

(c) Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month
following sale. The accounts receivable at December 31, 2004 are a result of December credit sales.
(d) The company’s gross profit rate is 40% of sales.
(e) Monthly expenses are budgeted as follows:
Salaries and wages Birr 27,000 per month
Advertising Birr 70,000 per month
Shipping 5% of sales
Depreciation Birr 14,000 per month
Other expenses 3% of sales
Note that cash expenses are paid as incurred.
(f) At the end of each month, inventory is to be on hand (minimum required or desired inventory level)
equal to 25% of the following month’s sales needs, stated at cost.
(g) One-half of a month’s inventory purchases are paid for in the month of purchase, the other half is
paid for in the following month.
(h) During February, the company will purchase a new copy machine for Birr 1,700 cash. During March,
other equipment will be purchased for cash at a cost of Birr 84,500.
(i) During January, the company will declare and pay Birr 45,000 in cash dividends.
(j) The company must maintain a minimum cash balance of Birr 30,000 each month. An open line of
credit is available at a local bank for any borrowing that may be needed during the quarter. All
borrowing is done at the beginning of a month, and all repayments are made at the end of a month.
Borrowings and repayments of principal must be in multiples of Birr 1,000. Interest is paid only at the
time of payment of principal. The annual interest rate is 12%.
Example 2

The treasurer of XYZ Company needs to prepare a cash budget for June, July and August. He has the
following information
1. Cash balance for may 31 $15,000, minimum cash balance required is $5,000
2. Net sales:
Actual Forecasted
January $ 28,000 June $76,800
February $31,500 July $100,000
March $49,500 August $125,000
April $64,000
May $72,000

3. All sales are on credit. The credit manager collects 80% accounts receivable in the month following
the sales, 10% in the second month, 8% in the third month and 2% is uncollectible.
4. Cost of goods sold: 75% of Nets sales each month, material purchase are 25% of CGS. The firm pays
for purchases as follows

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75%- the first month

25% - The second month following purchase
Direct labour expenses are 58%of CGS, factory overhead is 25% of CGS. The firms pay both of
these expenses in the month it incurs them
5. The forecast for selling and administrative expense is 19,000 per month from May through
December.
6. In June the company is expected to incur a liability of $120,000 for anew machine to make coiled
spring. Equal payment on the machine will start in July and continue for the next three month.

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