Company prepares monthly cash
Company prepares monthly cash budgets. Relevant data fromoperating 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 monthof purchase, and the balance due is paid in the month following thepurchase. All other items above are paid in the month incurred.Depreciation has been excluded from manufacturing overhead andselling 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 forland.
The company’s cash balance on January 1, 2017, is expected tobe $50,000. The company wants to maintain a minimum cash balance of$40,000.
Instructions
Prepare a cash budget for January and February in columnarform.
Answer:
| Jan | Feb | ||
| Openingbalance of cash on 1st Jan,2017 | 50,000 | ||
| Openingbalance of cash on 1st Feb,2017 | 106,000 | ||
| Add:- | Collectionsfor November month(200000*10%) | 20,000 | |
| Collectionsfor December month(280000*40%) & (280000*10%) | 112,000 | 28,000 | |
| Collectionsfor January month(350000*50%) & (350000*40%) | 175,000 | 140,000 | |
| Collectionsfor February month(400000*50%) | 200,000 | ||
| Interestreceived | 5,000 | ||
| Proceeds fromsale of securities | 6,000 | ||
| (A) | 362,000 | 480,000 | |
| Less:- | Directlabor | 85,000 | 112,000 |
| Manufacturingoverhead | 60,000 | 75,000 | |
| Selling &administrative overhead | 75,000 | 80,000 | |
| Payment forland | 20,000 | ||
| Directmaterial purchases payment for Jan 2017 (120000*30%) &(120000*70%) | 36,000 | 84,000 | |
| Directmaterial purchases payment for Feb 2017 (110000*30%) &(110000*70%) | 33,000 | ||
| (B) | 256,000 | 404,000 | |
| Closingbalance (A-B) | 106,000 | 76,000 |
Note:- Purchases of direct materials on December,2013 isirrelevant because payment for the same would have been made 30% inDec,2013 and balance 70% in Jan,2014. Hence it will have no effecton the budget of Jan,2017 & Feb,2017.
However, if purchases of direct materials was made on December2016, then $56000 (80000*70%) would have to be deducted from Jan2017 budget.
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