Question

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Iguana, Inc., manufactures bamboo picture frames that sell for $25 each. Each frame requires 4 linear feet of bamboo, which costs $3.00 per foot. Each frame takes approximately 30 minutes to build, and the labor rate averages $15 per hour. Iguana has the following inventory policies:

• Ending finished goods inventory should be 40 percent of next month’s sales.
• Ending direct materials inventory should be 30 percent of next month’s production.

Expected unit sales (frames) for the upcoming months follow:

March	375
April	450
May	500
June	600
July	575
August	625

Variable manufacturing overhead is incurred at a rate of $0.50 per unit produced. Annual fixed manufacturing overhead is estimated to be $6,000 ($500 per month) for expected production of 5,000 units for the year. Selling and administrative expenses are estimated at $550 per month plus $0.70 per unit sold.

Iguana, Inc., had $11,100 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale.

Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $5,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $350 in depreciation. During April, Iguana plans to pay $2,000 for a piece of equipment.

PA8-3 (Algo) Preparing Cash Budget [LO 8-4]

Required:
1. Compute the budgeted cash receipts for Iguana.
2. Compute the budgeted cash payments for Iguana.
3. Prepare the cash budget for Iguana. Assume the company can borrow in increments of $1,000 to maintain a $10,000 minimum cash balance.

Answer 1

Working notes:

1.Production Budget

Production Budget
	March	April	May	June	July	August
1. Sales	375	450	500	600	575	625
2. Add: Closing Inventory[(40% of next month sales]	180	200	240	230	250	0
3. Less: opening Inventory	0	180	200	240	230	250
4. Production	555	470	540	590	595	375

2. Direct material procurement Budget

Direct material procurement Budget
	March	April	May	June	July	August
Production Units	555	470	540	590	595	375
Direct material Required for Production of FG	2220	1880	2160	2360	2380	1500
	(555*4)	(470*4)	(540*4)	(590*4)	(595*4)	(375*4)
Add: Closing Direct material (30% of next month pdn)	564	648	708	714	450	0
Less: Opening Direct Material	666	564	648	708	714	450
	2118	1964	2220	2366	2116	1050

a)Budgeted cash receipts

Budgeted cash receipts
	April	May	June	July
1.Sale units	450	500	600	575
2.Selling price	25.00	25.00	25.00	25.00
Total Sales	11,250.00	12,500.00	15,000.00	14,375.00
80% Sales (Cash sales)	9,000.00	10,000.00	12,000.00	11,500.00
50% of Credit Sales	1,125.00	1,250.00	1,500.00	1,437.50
50% of Credit Sales of previous month	937.50	1,125.00	1,250.00	1,500.00
	11,062.50	12,375.00	14,750.00	14,437.50

b)Budgeted cash payments

Budgeted cash payments
	April	May	June	July
1. Units Procured	1964	2220	2366	2116
2.Per foot cost	3	3	3	3
	5892	6660	7098	6348
I. Payment For Purchase
80% During the month	4713.6	5328	5678.4	5078.4
20% Following Month	1100	1178.4	1332	1419.6
	5813.6	6506.4	7010.4	6498
II. Overhead
Variable Overhead	235	270	295	297.5
Fixed Overhead	150	150	150	150
	385	420	445	447.5
IV. Selling And Administrative
Fixed Cost	550	550	550	550
Variable Cost	315	350	420	402.5
	865	900	970	952.5
Labour Hour Required	235	270	295	297.5
Per hour Rate	15	15	15	15
V. Total Labour cost	3525	4050	4425	4462.5
VI. Payment For Equipment	2,000.00	-	-	-
Total Payment(I+II+III+IV+V+VI)	12588.6	11876.4	12850.4	12360.5

c) Cash budget

Cash budget
	April	May	June	July
Opening Cash	11100	10573.9	11072.5	12972.1
Add: Cash receipt	11062.5	12375	14750	14437.5
Less: Cash payment	12588.6	11876.4	12850.4	12360.5
Borrowings	1000	0	0	0
Closing Cash	10573.9	11072.5	12972.1	15049.1