Professional Documents
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Budgeting 4
Budgeting 4
The following details have been taken form the debtor collection
record of W pic:
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debts 5%
Customer paying in the month after the sale are allowed a 10%
discount.
Invoices for sales are issued on the last day of the month in which
the sales are made.
The budgeted credit sales for the final five months of this year are:
Month August September October November December
Credit sales $80,000 $100,000 $120,000 $130,000 $160,000
Calculate the total mount budgeted to be received in December from
credit sales. 1
Solution
2
Illustration D plc operates a retail business. Purchases are sold at
cost plus 25%. The management team are preparing the cash budget
and have gathered the following data:
3. Creditors are paid one month after the purchase has been made.3
2. Calculate the entries for “purchases” that will be shown in the
cash budget for:
(i) August
(ii) September
(iii) October
Solution Sale Price = 25% of Cost i.e. 125
All figures are £000 So cost will be 100/125 * 100 = 80%
Cost of sales
Opening Closing
Month Sales (80% of Purchase Paid
Inventory Inventory
sales)
July 100 80 40 36 76
August 90 72 36 50 86 76
September 125 100 50 56 106 86
October 140 112 56 106
4
Illustration
Q, a company, is being established to manufacture and sell an
electronic tracking device: the Track it. The owners are excited about
the future profits that the business will generate. They have forecast
that sales will grow to 2,600 Trackits per month within Five months
and will be at that level for the remainder of the first year.
The owners will invest a total of $250,000 in cash on the first day of
operations (that is the first day of Month 1). They will also transfer
non-current assets into the company.
5
Sales
The forecast sales for the first five months are:
Trackits
Month (units)
1 1,000
2 1,500
3 2,000
4 2,400
5 2,600
Sales receipts
Sales will be mainly through large retail outlets. The pattern for the
receipt of payment is expected to be as follows:
6
Time of payment % of sales value
Immediately 15
One month later 25
Two month later 40
Three month later 15
Production
The budget production volumes in units are:
Month 1 Month 2 Month 3 Month 4
1,450 1,650 2,120 2,460
Direct materials:
Payment for purchases will be made in the month following receipt.
There will be no opening inventory of materials in Month 1. It will
be company policy to hold inventory at the end of each month equal
to 20% at of the following month’s production requirements. The
direct materials cost includes the cost of an essential component that
will be bought in from a specialist manufacturer.
Required
(a) Prepare a cash budget for each of the first three months and for
that three-month period in total.
9
Solution
Sales receipts ($)
11
Illustration
Sales
The forecast sales for the first four months are as follows:
Month Number of
components
1 1,500
2 1,750
3 2,000
4 2,100 12
The selling price has been set at £10 per component in the first four
months.
Sales receipts
Fixed overhead costs are estimated at £75,000 per annum and are
expected to be incurred in equal amounts each month. 60% of the
fixed overhead costs will be paid in the month in which they are
incurred and 30% in the following month. The balance represents
depreciation of fixed assets.
Required:
(a) Prepare a cash budget for each of the first three months and in
total.
15
Solution
(a)
£ £ £
Sales receipts 2,940 10,180 15,545
Capital injection 16,250
Total receipts 19,190 10,180 15,545
Outflow
Materials 0 3,515 3,420
Labour 6,105 5,940 6,666
Variable overhead 1,332 2,184 2,318
Fixed overhead 3,750 5,625 5,625
Total Outflow 11,187 17,264 18,029
16
Inflow-Outflow 8,003 -7,840 -2,484
Bal b/fwd 0 8,003 919
Bal c/fwd 8,003 919 -1,565
Workings
Sales receipts 1 2 3
Sales units 1,500 1,750 2,000
£ £ £
Selling price 10 10 10
Sales 15,000 17,500 20,000
Paid in month - 20% 3,000 3,500 4,000
Discount paid in month 2% -60 -70 -80
45% in the following month 6,750 7,875
25% in 3rd month 3,750
17
Receipts 2,940 10,180 15,545
Production 1 2 3 4
units units units units
Required by sales 1,500 1,750 2,000 2,100
Opening inventory (350) (400)
1,500 1,400 1,600
Closing inventory 350 400 420
Production 1,850 1,800 2,020
Material price £1.90 £1.90 £1.90
Material cost £3,515 £3,420 £3,838
Payment £3,515 £3,420
18
Labour
Production units 1,850 1,800 2,020
Rate per unit £3.30 £3.30 £3.30
Payment £6,105 £5,940 £6,666
Variable overhead
Production units 1,850 1,800 2,020
Rate per unit £1.20 £1.20 £1.20
Variable overhead cost £2,220 £2,160 £2,424
Payment £ £ £
60% in month 1,332 1,296 1,454
40% in following month 888 864
Payment 1,332 2,184 2,318
19
Fixed overhead 6,250 6,250 6,250
Payment
60% in month 3,750 3,750 3,750
30% in following month - 1,875 1,875
Payment 3,750 5,625 5,625
20
Illustration
ABC Company Limited has the following Balance Sheet as on 31st December
2012.
Rs(000) Rs(000)
Assets Liabilities
Cash 50 Payables 360
Receivable 530 Acrued Expense 212
Inventories 545 Bank Loan 400
Current Assets 1125 Current Liabilities 972
Fixed Assets Net 1836 Long Term Debt 450
Paid up Capital 100
Reserves 1439
2961 2961
21
Illustration
The company has received a large order and in anticipation it needs to go to bankers in order to increase its borrowings
As a result it needs to forecast its cash requirements for January ,Febraury & March 2013.
The Company Collects 20% of its Sales in the month of Sales .All sales are Credit
1. Purchases of raw material are made in the month prior to the sales and amount to 60% of sales in the subsequent month
Payments of purchases occur in the month after purchases .
2. Labour Costs including overtime are expected to be Rs 150,000/- in January and Rs. 200,000/- in February and Rs 160,000 in
March.
3.Selling and Admin Expense and cash expenses are expected to be Rs 100,00/- per month
4. Actual sales in November and December 2012 and projected sales from January to April 2013 are ass under
Rs.
(000)
Rs.
Nov RS 500 Feb 1000
23
Solution
CASH BUDGET
JAN FEB MARCH
Payments
For Dec Purcahses 360
For Jan Purcahses 600
For Feb Purcahses 390
Labor Costs 150 200 160
Selling and Admin Expense 100 100 100
Opening balance 50 50 50
Bank borrowing (payments) 20 220 -240
24
Ending Balance 50 50 50
Solution
ABC Co.
Income Statement for the three month ending 31st March 2013
Rs.
Sales 2250
Cost of Sales
Opening Stock 545
Purchases 1440
1985
Closing Stock 635
1350
Gross Profit 900
Expenses
Labour Cost 510
Administrative cost 300
Depreciation 24 834
Profit 66
Retained Profit B/f 1439
Retained Profit C/f 1505
3117 3117
26
27
28
Nov Dece Jan Feb Mar Apr
Receipt
Payments
Opening balance 50 50 50