Chapter 8: Master Budgeting

Cash Budgeting math

(15th edition: E8-19) E8-21 You have been asked to prepare a December cash budget for
Ashton Company, a distributor of exercise equipment. The following information is available
about the company’s operations:

a. The cash balance on December 1 is $40,000.

b. Actual sales for October and November and expected sales for December are as
follows:

October November December

Cash sales $65,000 $70,000 $83,000
Sales on account $400,000 $525,000 $600,000

Cash Collection Policy/Schedule

Sales on account are collected over a three-month period as follows: 20% collected in the
month of sale (Dec), 60% collected in the month following sale (Nov), and 18% collected in
the second month following sale (Oct). The remaining 2% is uncollectible.

c. Purchases of inventory will total $280,000 for December. Thirty percent of a month’s
inventory purchases are paid during the month of purchase. The accounts payable
remaining from November’s inventory purchases total $161,000, all of which will be
paid in December.
d. Selling and administrative expenses are budgeted at $430,000 for December. Of
this amount, $50,000 is for depreciation.
e. A new web server for the Marketing Department costing $76,000 will be purchased
for cash during December, and dividends totalling $9,000 will be paid during the
month.
f. The company maintains a minimum cash balance of $20,000. An open line of credit is
available from the company’s bank to increase its cash balance as needed.

Required:

1. Calculate the expected cash collections for December.

2. Calculate the expected cash disbursements for merchandise purchases for December.
3. Prepare a cash budget for December. Indicate in the financing section any borrowing
that will be needed during the month. Assume that any interest will not be paid until
the following month.

In this math, we’ll prepare the cash budget. There are 2 subordinate schedules,
1. Prepare a schedule of expected cash collections
2. Prepare the expected cash disbursements
In the previous lecture, we learned that ‘Revenue is the most regular source of income for
an organization.’
First, we’ve to prepare a schedule for No. 1 Prepare/Calculate the expected cash collections
for December.
 1. Schedule of expected cash collections:
December cash sales $ 83,000
Collections on account
October sales: ($400,000 × 18%) 72,000
November sales: ($525,000 × 60%) 315,000
December sales: ($600,000 × 20%) 120,000 507,000
Total cash collections= $590,000
2. Schedule of expected cash payment:
Payments against: Amount
November purchases $161,000
December purchases $280,000 × 30% 84,000
Total cash to be paid= $245,000
3. Cash Budget
Ashton Company
Cash Budget
For the Month of December
Particulars Amount
Beginning balance 40,000
(+) total cash to be collected (from 590,000
requirement 1)
Total cash available= 630,000
(-) cash disbursements
Or Tentative Payments:
Payments to suppliers for 245,000
inventory
Or inventory purchase
Selling and administrative 380,000 (this is also cash
expenses expenditure)
($430,000 – $50,000)
New web server 76,000
Dividends paid 9,000
Total cash disbursements 710,000
Or cash to be paid=
Excess/deficiency of cash available over disbursements (80,000)
Or Shortage/ Deficiency =
Financing:
Borrowings (80,000+20,000) so we must borrow 100,000. 100,000
Repayments (no info, tai zero) 0
Interest 0
Total financing 100,000
Ending cash balance= $ 20,000
 Class: (24th March 2020) 2nd Video
(15th edition: E8-16) The production department of Zan Corporation has submitted the
following forecast of units to be produced by quarter for the upcoming fiscal year:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Units to be produced 5,000 8,000 7,000 6,000
In addition, 6,000 grams of raw materials inventory is on hand at the start of the 1st Quarter
(the beginning amount) and the beginning accounts payable for the 1st Quarter is $2,800.
(2,800 hasn’t paid in last quarter, that’s why we’ve to pay it in next quarter which is 1st
Quarter)
 Each unit requires 8 grams of raw material that costs $1.20 per gram. (This is input
output relationship. Memorize the 1st class, 3 cubic centimetre solvency...)
 Management desires to end each quarter with an inventory of raw materials equal to
25% of the following quarter’s production needs. The desired ending inventory for the
4th Quarter is 8,000 grams. (4th Quarter is ending inventory of raw materials)
 Management plans to pay for 60% of raw material purchases in the quarter acquired
(the organization will not be able to pay100% or whole amount rather they will pay
60% of the total amount due) and 40% in the following quarter.(remaining 40% they
will pay in the next quarter because organization has always cash/liquidity problem.
As they sell and collect amounts from the customers on instalment, same way when
they make the payment to the creditors, they also make the payment on instalment).
Each unit requires 0.20 direct labour-hours and direct laborers are paid $11.50 per
hour. (this is related with direct labour budget)
Required:
1. Calculate the estimated grams of raw material that need to be purchased each
quarter and for the year.
(Here the 8 grams is standard quality of raw materials and $1.20 is standard
price of raw materials. Without checking standard, we can’t prepare budget.
So, budget and standard go together/related with each other.)
2. Calculate the cost of raw material purchases for each quarter and for the year.
3. Calculate the expected cash disbursements for purchases of materials for each
quarter and for the year.
Budget is a planning tool, control tool.
We’ve covered production budget, raw materials budget, direct labour budget,
manufacturing overhead budget. We’ve also prepared cash budget, cash collection
schedule, cash payment schedule in the last classes.
Today we will see after preparing the direct labour purchase budget, how we will prepare a
cash budget on the basis of the amount to be paid for the raw material that we’ll purchased.
 1. Prepare budgeted Raw Material to be purchased in gram:
Particulars Month
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
From accounts 5,000 8,000 7,000 6,000 26,000
receivable
Total Raw (5,000x8) (8,000x8) (7,000x8) (6,000x8)
Material needed =40,000 =64,000 =56,000 =48,000
for budgeted 208,000
production @8
gram per units
(+) ending (64,000x25%) (56,000x25%) (48,000x25%) 8,000
inventory of raw =16,000 =14,000 =12,000 (Given in
materials: the 8,000
question)

(-) Beginning 6,000 16,000 14,000 12,000 6,000

inventory of raw (Given in the
materials: question)
Budgeted Raw 50,000 62,000 54,000 44,000 210,00
Material to be
purchased in gram
2. Prepare budgeted total cost of Raw Material:
Particulars Month
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Budgeted Raw Material to be 50,000 62,000 54,000 44,000 210,00
purchased in gram
Budgeted Total cost of Raw 50,000x1.20 62,000x1.20 54,000x1.20 44,000x1.20 210,00
Material @1.20 per gram
Budgeted Total cost of Raw $60,000 $74,400 $64,800 $52,800 $252,000
Material =
3. Cash Disbursement schedule
Particulars Month
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Payment Against 2,880 - - - 2,880
Beginning A/P
1st Quarter Purchased 36,000 24,000 - - 60,000
(60%, 40% of $60,000)
2nd Quarter Purchased - 44,640 29,760 - 74,400
(60%, 40% of $74,400)
3rd Quarter Purchased - - 38,880 25,920 64,800
(60%, 40% of $64,800)
4th Quarter Purchased - - - 31,680 31,680
(60%, 40% of $52,800)
Total Cash to be paid 38,880 68,640 68,640 57,600 233,760