Question

Company prepares monthly cash budgets. Relevant data from operating budgets for 2017 are:

January February

Sales $350,000 $400,000

Direct materials purchases 120,000 110,000

Direct labor 85,000 112,000

Manufacturing overhead 60,000 75,000

Selling and administrative expenses 75,000 80,000

All sales are on account. Collections are expected to be 50% in the month of sale, 40% in the first month following the sale, and 10% in the second month following the sale. Thirty percent (30%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other items above are paid in the month incurred. Depreciation has been excluded from manufacturing overhead and selling and administrative expenses.

Other data:

1. Credit sales: November 2016, $200,000; December 2016, $280,000.

2. Purchases of direct materials: December 2013, $80,000.

3. Other receipts: January—Collection of December 31, 2016, interest receivable $5,000;

February—Proceeds from sale of securities $6,000.

4. Other disbursements: February—payment of $20,000 for land.

The company’s cash balance on January 1, 2017, is expected to be $50,000. The company wants to maintain a minimum cash balance of $40,000.

Instructions

Prepare a cash budget for January and February in columnar form.

Answer 1

		Jan	Feb
	Opening balance of cash on 1st Jan,2017	50,000
	Opening balance of cash on 1st Feb,2017		106,000
Add:-	Collections for November month(200000*10%)	20,000
	Collections for December month(280000*40%) & (280000*10%)	112,000	28,000
	Collections for January month(350000*50%) & (350000*40%)	175,000	140,000
	Collections for February month(400000*50%)		200,000
	Interest received	5,000
	Proceeds from sale of securities		6,000
	(A)	362,000	480,000
Less:-	Direct labor	85,000	112,000
	Manufacturing overhead	60,000	75,000
	Selling & administrative overhead	75,000	80,000
	Payment for land		20,000
	Direct material purchases payment for Jan 2017 (120000*30%) & (120000*70%)	36,000	84,000
	Direct material purchases payment for Feb 2017 (110000*30%) & (110000*70%)		33,000
	(B)	256,000	404,000
	Closing balance                                                                                                                           (A-B)	106,000	76,000

Note:- Purchases of direct materials on December,2013 is irrelevant because payment for the same would have been made 30% in Dec,2013 and balance 70% in Jan,2014. Hence it will have no effect on the budget of Jan,2017 & Feb,2017.

However, if purchases of direct materials was made on December 2016, then $56000 (80000*70%) would have to be deducted from Jan 2017 budget.