Question

F. Jack comes to see you in February 2020. He is full of enthusiasm for a new product that he is about to launch on to the market. Unfortunately, his financial recklessness in the past has led him into being bankrupt twice, and he has only just been discharged by the court from his second bankruptcy. ‘Look here, Amben,’ he says, ‘with my new idea I’ll be a wealthy man before Christmas.’ ‘Calm down,’ you say, ‘and tell me all about it.’ Jack’s plans as far as cash is concerned for the next six months are:

(a) Opening cash (including bank) balance on 1 July 2020 £3,600

(b) Production in units:

2020										2021
Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Jan
720	810	900	960	1,050	1,110	1,140	1,020	930	780	750

(c) Raw materials used in production cost £15 per unit. Of this, 90 per cent is paid in the month of production and 10 per cent in the month after production.

(d) Direct labour costs of £24 per unit are payable in the month of production.

(e) Variable expenses are £6 per unit, payable 40 per cent in the same month as production and 60 per cent in the month following production.

(f) Sales at £60 per unit:

2020
Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov
780	600	960	870	1,200	900	1,050	1,200	1,170	1,200

Debtors to pay their accounts three months after that in which sales are made.

(g) Fixed expenses of £1,200 per month payable each month.

(h) Machinery costing £6,000 to be paid for in September 2020. The machine has a useful life of 5 years and depreciation is computed using the reducing balance method.

(i) Will receive a legacy of £7,500 in November 2020 and will pay it into the business account.

(j) Drawings will be £900 per month.

You are required:

Draw up a cash budget for F. Jack showing the balance at the end of each month, from the above information for the six months ended 31 December 2020:

Answer 1

Cash Budget for F. Jack

Cash Budget
Particulars	July	August	September	October	November	December
Beginning Cash balance	3,600	12,309	12,765	25,518	30,906	56,997
Add: Collection from Debtors (WN-1)	57,600	52,200	72,000	54,000	63,000	72,000
Receipt of Legacy	-	-	-	-	7,500	-
Total cash available	61,200	64,509	84,765	79,518	1,01,406	1,28,997
Cash payments for
Cash payments for merchandise(WN-2)	46,791	49,644	51,147	46,512	42,309	35,865
Drawings	900	900	900	900	900	900
Amount paid for Machinery	-	-	6,000	-	-
Fixed Expenses	1,200	1,200	1,200	1,200	1,200	1,200
Total cash payments	48,891	51,744	59,247	48,612	44,409	37,965
Ending cash balance	12,309	12,765	25,518	30,906	56,997	91,032

Computation of sales & Collection from Debtors

Receipt from Debtors.(Debtors paid three months after that in which sales are made.)

Particulars	July	August	September	October	November	December
Sales-Receipt from 3rd month	$       57,600	$       52,200	$       72,000	$    54,000	$     63,000	$      72,000
Collection from Debtors	$     57,600	$     52,200	$     72,000	$ 54,000	$    63,000	$    72,000

Actual Monthly Sales
Particulars	Feb	Mar	April	May	June	July	August	September	October	November
Units	780	600	960	870	1,200	900	1,050	1,200	1,170	1,200
Sale amount (60 per unit)	46,800	36,000	57,600	52,200	72,000	54,000	63,000	72,000	70,200	72,000

Working Note -2 Production cost & Cash payments for Merchandise -Monthly
Particulars	Mar	April	May	June	July	August	September	October	November	December	January
Units Produced	720	810	900	960	1,050	1,110	1,140	1,020	930	780	750
Material (15 per unit)	10,800	12,150	13,500	14,400	15,750	16,650	17,100	15,300	13,950	11,700	11,250
Labor cost (24 per unit)	17,280	19,440	21,600	23,040	25,200	26,640	27,360	24,480	22,320	18,720	18,000
Variable cost (6 per unit)	4,320	4,860	5,400	5,760	6,300	6,660	6,840	6,120	5,580	4,680	4,500
Total cost	32,400	36,450	40,500	43,200	47,250	49,950	51,300	45,900	41,850	35,100	33,750

Cash payments for Merchandise -Monthly
Computation of payment	July	August	September	October	November	December
Material (10% of previous month)	1,440	1,575	1,665	1,710	1,530	1,395
Material (90% of current month)	14,175	14,985	15,390	13,770	12,555	10,530
Total Material cost (a)	15,615	16,560	17,055	15,480	14,085	11,925
Labor cost (b)	25,200	26,640	27,360	24,480	22,320	18,720
Variable cost (60% of previous month)	3,456	3,780	3,996	4,104	3,672	3,348
Variable cost (40% of current month)	2,520	2,664	2,736	2,448	2,232	1,872
Total Variable cost (c )	5,976	6,444	6,732	6,552	5,904	5,220
Total Payment for production (a+b+c)	46,791	49,644	51,147	46,512	42,309	35,865