Question

TO Industries prepares monthly cash budgets. The following budget information is available for July and August 2017:

	July	August
Sales	$700,000	$800,000
Direct material purchases	220,000	240,000
Direct labor	200,000	230,000
Manufacturing overhead	120,000	150,000
Selling and administrative expenses	150,000	160,000

All sales are credit sales. The company expects to collect 60% from customers in the month of the sale and the remaining 40% in first month following the sale. The company purchases direct materials on account. The company pays for 70% of the purchases in the month of the purchases and the remaining 30% in the first month following the purchase. Direct labor, manufacturing overhead, and selling and administrative expenses are paid in cash in the month incurred.

Additional information:

June 2017 credit sales were $580,000

June 2017 purchases of direct materials were $180,000

The company’s cash balance on July 1, 2017 is expected to be $100,000

The company wants to maintain a minimum cash balance of $80,000 and has a line of credit in the amount of 1,000,000 available to borrow if the budgeted cash balance falls below that level

Required

Prepare a schedule of cash collections from credit sales for July and August 2017.

Prepare a schedule of cash disbursements for direct material purchases for July and August 2017.

Prepare a cash budget for July and August 2017 in columnar format.

Answer 1

schedule of cash collection
cash collection	July	August
40% of June sale	232000	280000
60% of the month sale	420000	480000
total cash collection	652000	760000
schedule of payment to direct material purchase
cash disbursement
30% of the previous month purchase	54000	66000
70% of the month sale	154000	168000
total cash disbursement to direct material	208000	234000
cash budget
		july	august
opening balance of cash		100000	80000
total cash collection		652000	760000
total cash available		752000	840000
less payment
direct material		208000	234000
direct labor		200000	230000
manufacturing overhead		120000	150000
selling and administrative expenses		150000	160000
total of cash disbursement		678000	774000
excess or deficiency of cash		74000	66000
borrowing/ repayment		6000	14000
Minimum cash balance		80000	80000