Question

Danner Company expects to have a cash balance of $45,900 on January 1, 2020. Relevant monthly budget data for the first 2 months of 2020 are as follows.

Collections from customers: January $86,700, February $153,000.

Payments for direct materials: January $51,000, February $76,500.

Direct labor: January $30,600, February $45,900. Wages are paid in the month they are incurred.

Manufacturing overhead: January $21,420, February $25,500. These costs include depreciation of $1,530 per month. All other overhead costs are paid as incurred.

Selling and administrative expenses: January $15,300, February $20,400. These costs are exclusive of depreciation. They are paid as incurred.

Sales of marketable securities in January are expected to realize $12,240 in cash. Danner Company has a line of credit at a local bank that enables it to borrow up to $25,500. The company wants to maintain a minimum monthly cash balance of $20,400.

Prepare a cash budget for January and February.

Answer 1

	January	February
(A) Opening cash balance	$45,900	$28,050
Receipts :
Collections from customers	$86,700	$153,000
Sale of marketable securities	$12,240
(B) Total receipts	$98,940	$153,000
(C) Total cash available (A + B)	$144,840	$181,050
Disbursements :
Payment for direct materials	$51,000	$76,500
Payment for direct labor	$30,600	$45,900
Payment for manufacturing overhead [ monthly overhead - depreciation per month ]	$19,890	$23,970
Payment for selling and administrative expenses	$15,300	$20,400
(D) Total disbursements	$116,790	$166,770
Cash surplus ( deficit ) (C - D)	$28,050	$14,280
(+) Borrowing [ to meet minimum cash balance requirement ]	-	$6,120 [ $20,400 - $14,280 ]
Closing cash balance	$28,050	$20,400

Notes : 1) In January there was a surplus cash balance of $28,050 and the minimum cash balance required was $20,400. Thus, here there was no need to borrow money as the minimum cash requirement was met by them. However, in the month of February, there is a surplus cash balance of $14,280 which is below the minimum cash balance requirement and hence $6,120 is borrowed [ they can borrow upto $25,500 ] so that the minimum cash balance can be maintained.

2) Closing cash balance of January will be the opening cash balance of February.

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