Illustration

The following details have been taken form the debtor collection
record of W pic:
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debts 5%
Customer paying in the month after the sale are allowed a 10%
discount.
Invoices for sales are issued on the last day of the month in which
the sales are made.
The budgeted credit sales for the final five months of this year are:
Month August September October November December
Credit sales $80,000 $100,000 $120,000 $130,000 $160,000
Calculate the total mount budgeted to be received in December from
credit sales. 1
Solution

Sales Month of sale Factor Receive December

$
130,000 November 60% *90% 70,200
120,000 October 20% 24,000
100,000 September 15% 15,000
Total 109,200

2
Illustration D plc operates a retail business. Purchases are sold at
cost plus 25%. The management team are preparing the cash budget
and have gathered the following data:

1. The budgeted sales are as follows:

Month Sales (000)
July 100
August 90
September 125
October 140
Total 455
2. It is management policy to hold inventory at the end of each
month which is sufficient to meet sales demand in the next half
month. Sales are budgeted to occur evenly during each month.

3. Creditors are paid one month after the purchase has been made.3
 2. Calculate the entries for “purchases” that will be shown in the
cash budget for:

(i) August
(ii) September
(iii) October
Solution Sale Price = 25% of Cost i.e. 125
All figures are £000 So cost will be 100/125 * 100 = 80%

Cost of sales
Opening Closing
Month Sales (80% of Purchase Paid
Inventory Inventory
sales)
July 100 80 40 36 76
August 90 72 36 50 86 76
September 125 100 50 56 106 86
October 140 112 56 106
4
Illustration
Q, a company, is being established to manufacture and sell an
electronic tracking device: the Track it. The owners are excited about
the future profits that the business will generate. They have forecast
that sales will grow to 2,600 Trackits per month within Five months
and will be at that level for the remainder of the first year.

The owners will invest a total of $250,000 in cash on the first day of
operations (that is the first day of Month 1). They will also transfer
non-current assets into the company.

Extracts from the company’s business plan are shown below.

5
 Sales
The forecast sales for the first five months are:

Trackits
Month (units)

1 1,000
2 1,500
3 2,000
4 2,400
5 2,600

The selling price has been set at $140 per Trackit.

Sales receipts
Sales will be mainly through large retail outlets. The pattern for the
receipt of payment is expected to be as follows:
6
 Time of payment % of sales value
Immediately 15
One month later 25
Two month later 40
Three month later 15

The balance represents anticipated bad debts.

A 4% discount will be given for immediate payment.

Production
The budget production volumes in units are:
Month 1 Month 2 Month 3 Month 4
1,450 1,650 2,120 2,460

Variable production cost

The budgeted variable production cost is $90 per unit, comprising:
7
 $
Direct materials 60
Direct wages 10
Variable production overheads 20
Total variable cost 90

Direct materials:
Payment for purchases will be made in the month following receipt.
There will be no opening inventory of materials in Month 1. It will
be company policy to hold inventory at the end of each month equal
to 20% at of the following month’s production requirements. The
direct materials cost includes the cost of an essential component that
will be bought in from a specialist manufacturer.

Direct wageswill be paid in the month in which the production

occurs.
8
Variable production overheads: 65% will be paid in the month in
which production occurs and the remainder will be paid one month
later.

Fixed overhead costs

Fixed overheads are estimated at $840,000 per annum and are
expected to be incurred in equal amounts each month. 60% of the
fixed overhead costs will be paid in the month in which they are
incurred and 15% in the following month. The balance represents
depreciation of noncurrent assets.

Required
(a) Prepare a cash budget for each of the first three months and for
that three-month period in total.

9
Solution
Sales receipts ($)

Month 1 Month 2 Month 3

Sales 140,000 210,000 280,000
Receipts
15% less discount 20,160 30,240 40,320
+ 1 month, 25% 35,000 52,500
+ 2 month, 40% - - 56,000
Total 20,160 65,240 148,820

Material purchases ($)

Month 1 Month 2 Month 3 Month 4
Material uses 87,000 99,000 127,200 147,600
Closing inventory + 19,800 25,440 29,520
Opening inventory - - 19,800 25,440
Purchase 106,800 104,640 131,280
Paid - 106,800 104,640
10
Cash Budget
Month 1 Month 2 Month 3 Total
$ $ $ $
Material 106,800 104,640 211,440
Labour 14,500 16,500 21,200 52,200
Variable overheads 18850 31,600 39,110 89,560
Fixed overheads 42,000 52,500 52,500 147,000
Total payments 75,350 207,400 217,450 500,200
Receipts 20,160 65,240 148,820 234,220
Net cash flow -55,190 -142,160 -68,630 -265,980
Opening Balance 250,000 194,810 52,650 250,000
Closing Balance 194,810 52,650 -15,980 -15,980

11
Illustration

RF Ltd is a new company which plans to manufacture a specialist

electrical component. The company founders will invest £16,250
on the first day of operations, that is, Month 1. They will also
transfer fixed capital assets to the company.
The following information is available:

Sales
The forecast sales for the first four months are as follows:

Month Number of
components
1 1,500
2 1,750
3 2,000
4 2,100 12
The selling price has been set at £10 per component in the first four
months.
Sales receipts

Time of payment % of customers

Month of sale 20*
One month later 45
Two months later 25
Three months later 5

The balance represents anticipated bad debts.

*A 2% discount is given to customers for payment received in the
month of sale.
Production
There will be no opening inventory of finished goods in Month 1 but
after that it will be policy for the closing inventory to be equal to
20% of the following month’s forecast sales. 13
Variable production cost
The variable production cost is expected to be £6·40 per component.
£
Direct materials 1·90
Direct wages 3·30
Variable production overheads 1·20
Total variable cost 6.40
Notes:
Direct materials:
100% of the materials required for production will be purchased in
the month of production. No inventory of materials will be held.
Direct materials will be paid for in the month following purchase.

Direct wages will be paid in the month in which production occurs.

Variable production overheads: 60% will be paid in the month in

which production occurs and the remainder will be paid one month
later. 14
Fixed overhead costs

Fixed overhead costs are estimated at £75,000 per annum and are
expected to be incurred in equal amounts each month. 60% of the
fixed overhead costs will be paid in the month in which they are
incurred and 30% in the following month. The balance represents
depreciation of fixed assets.

Calculations are to be made to the nearest £1.

Required:
(a) Prepare a cash budget for each of the first three months and in
total.

15
Solution
(a)

£ £ £
Sales receipts 2,940 10,180 15,545
Capital injection 16,250
Total receipts 19,190 10,180 15,545

Outflow
Materials 0 3,515 3,420
Labour 6,105 5,940 6,666
Variable overhead 1,332 2,184 2,318
Fixed overhead 3,750 5,625 5,625
Total Outflow 11,187 17,264 18,029

16
Inflow-Outflow 8,003 -7,840 -2,484
Bal b/fwd 0 8,003 919
Bal c/fwd 8,003 919 -1,565

Workings
Sales receipts 1 2 3
Sales units 1,500 1,750 2,000
£ £ £
Selling price 10 10 10
Sales 15,000 17,500 20,000
Paid in month - 20% 3,000 3,500 4,000
Discount paid in month 2% -60 -70 -80
45% in the following month 6,750 7,875
25% in 3rd month 3,750
17
Receipts 2,940 10,180 15,545

Production 1 2 3 4
units units units units
Required by sales 1,500 1,750 2,000 2,100
Opening inventory (350) (400)
1,500 1,400 1,600
Closing inventory 350 400 420
Production 1,850 1,800 2,020
Material price £1.90 £1.90 £1.90
Material cost £3,515 £3,420 £3,838
Payment £3,515 £3,420

18
Labour
Production units 1,850 1,800 2,020
Rate per unit £3.30 £3.30 £3.30
Payment £6,105 £5,940 £6,666

Variable overhead
Production units 1,850 1,800 2,020
Rate per unit £1.20 £1.20 £1.20
Variable overhead cost £2,220 £2,160 £2,424

Payment £ £ £
60% in month 1,332 1,296 1,454
40% in following month 888 864
Payment 1,332 2,184 2,318
19
Fixed overhead 6,250 6,250 6,250
Payment
60% in month 3,750 3,750 3,750
30% in following month - 1,875 1,875
Payment 3,750 5,625 5,625

20
 Illustration

ABC Company Limited has the following Balance Sheet as on 31st December
2012.
Rs(000) Rs(000)
Assets Liabilities
Cash 50 Payables 360
Receivable 530 Acrued Expense 212
Inventories 545 Bank Loan 400
Current Assets 1125 Current Liabilities 972
Fixed Assets Net 1836 Long Term Debt 450
Paid up Capital 100
Reserves 1439
2961 2961
21
 Illustration
• The company has received a large order and in anticipation it needs
to go to bankers in order to increase its borrowings. As a result it
needs to forecast its cash requirements for January, February &
March 2013.
• The Company Collects 20% of its Sales in the month of Sales, 70% in
the subsequent month and 10 percent in the second month of sale.
All sales are credit sales.
• Purchases of raw material are made in the month prior to the sales
and amount to 60% of sales in the subsequent month. Payments of
purchases occur in the month after purchases.
• Labor Costs including overtime are expected to be Rs 150,000 in
January and Rs. 200,000- in February and Rs 160,000 in March.
• Selling and Admin Expense and cash expenses are expected to be
Rs 100,000/- per month. Actual sales in November and December
2012 and projected sales from January to April 2013 are as under
Month Rs. Month Rs.
November 500 February 1,000
December 600 March 650
January 600 April 750 22
 Illustration
Being a management accountant of the
company prepare:
A. Cash Budget for Jan Feb March
2013.
B. Determine the amount of additional bank borrowing necessary
to maintain a
Cash balance of Rs. 50,000/- at all times. (ignore interest on
such borrowing).
C. Prepare a forecast income statement for the three months ending 31st
March 2013.
D. Prepare a forecast balance sheet as on 31st March 2013 ( Please be
noted that the company maintains a safety stock of inventory and
depreciation of three month period is expected to be Rs 24,000/-

23
 Solution
CASH BUDGET
JAN FEB MARCH
Receipts (Amount in Rs 000)
20% in the month of sales 120 200 130
70 % in the subsequent Month 420 420 700
10% in the 2nd Month of Sales 50 60 60
Total 590 680 890

Payments
For Dec Purcahses 360
For Jan Purcahses 360
For Feb Purcahses 600
Labor Costs 150 200 160
Selling and Admin Expense 100 100 100

Total 610 900 650

Surplus or Deficit -20 -220 240

Opening balance 50 50 50
Bank borrowing (payments) 20 220 -240
Ending Balance 50 50 50
24
 Solution
ABC Co.
Income Statement for the three month ending 31st March 2013

Rs.
Sales 2250
Cost of Sales
Opening Stock 545
Purchases 1440
1985
Closing Stock 635
1350
Gross Profit 900

Expenses
Labour Cost 510
Administrative cost 300
Depreciation 24 834
Profit 66
Retained Profit B/f 1439
Retained Profit C/f 1505

Note: There is a safety of Rs.185,000 maintained by the Co.

Opening Stock 545,000

less purchases in Dec for Jan sales 360,000
25
185,000
 Solution
ABC Ltd
Balance Sheet
As at 31st March 2013
Assets: Liabilities:
Cash 50 Creditors 450
Receivables 620 Bank loan 400
Inventory 635 Acc Expenses 212
Fixed Asset 1812 Current Liabilities 1062
L.T Debt 450
Capital paid up 100
Revenue 1505

3117 3117
26