Question

At the beginning of the 2010 school year, Britney Logan decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget:
Cash balance, September 1 (from a summer job) . . . . . . . . . . . . . . . . . . . . . . . $7,000
Purchase season football tickets in September . . . . . . . . . . . . . . . . . . . . . . . . . 100
Additional entertainment for each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Pay fall semester tuition on September 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800
Pay rent at the beginning of each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Pay for food each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Pay apartment deposit on September 2 (to be returned Dec. 15) . . . . . . . . . . . . 500
Part-time job earnings each month (net of taxes) . . . . . . . . . . . . . . . . . . . . . . . . 900
a. Prepare a cash budget for September, October, November, and December.
b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets?
c. What are the budget implications for Britney Logan?

Answer 1

(a)

 

(b)

The four-month budgets do not change with any identified activity level, thus, they are static budgets.

 

(c)

While Logan's budget might first appear satisfactory, Logan must earn enough cash in order to pay for the spring semester tuition. Her present budget shows that she will be $300 short of the tuition amount ($3,800-$3,500). Thus, Logan will likely need to adjust the plan before the fall term even begins. Some possibilities would be to rent a lower cost apartment or to get a roommate so that the rental cost is cut in half An additional $175 per month would yield $700 by the end of December which would be sufficient to cover the $300 spring tuition shortfall and provide a little extra. Other considerations include increasing her part-time job hours and reducing her monthly entertainment and food allowance, or making up the income difference with additional hours during Christmas break. The budget gives Logan time to adjust her plans to future events. In this case, Logan can see that her present plan will not provide sufficient cash, thus giving her four months to adjust. 

If Logan did not budget but went ahead with the original plan, she would be $300 short at the end of December with no time left to adjust.