Question Tag: Cash Budget

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  • 1 Marks

MI – May 2016 – L1 – SA – Q7 – Budgeting

Identify the budget that is not a functional budget from the given options.

The following are functional budgets EXCEPT:
A. Sales budget
B. Production budget
C. Distribution budget
D. Cash budget
E. Selling cost budget

Answer:
D. Cash budget

Explanation:
Functional budgets are specific budgets that relate to different functions or departments within an organization, such as sales, production, and distribution. The cash budget, however, is a financial budget, not a functional one. It focuses on the inflows and outflows of cash within the business, rather than on a specific function or department. Therefore, the cash budget is not considered a functional budget.

  • 20 Marks

MI – May 2024 – L1 – SB – Q2 – Budgeting

Prepare a cash budget based on sales collections, purchases, and other financial data for the third quarter.

Breakable Limited is preparing for the last half of the year and you, as the cost accountant, have been requested to prepare the cash budget for the third quarter of the year. The following information were available:

  1. Sales – 20% of monthly sales are in cash, while the balance is on credit.
    a. Collections from receivables are as follows:
    i. 60% in the first month after sales.
    ii. 20% in the second month; and
    iii. The balance after considering 1% bad debt and 5% discount on the outstanding balance in the third month after sales.
  2. Purchases are usually 60% of the month’s Sales and are paid for 70% in the same month and 30% in the following month less 2% discount on the total purchase price.
  3. Loan of N500,000 is expected to be approved by the bank on the first day of August, payable equally over twelve months with one month moratorium and 1% interest on the outstanding.
  4. Salary deductions are paid on the preceding month’s basis.
  5. The sum of N951,550 being a fixed deposit will mature in the month of July; N500,000 will be reinvested the same month with 0.5% interest credited the following month.
  6. Cash and cash equivalent balance as at end of June is N1,050,706.
  7. Bank Charges are 1% of total outflow from the bank payment for the month.
  8. Additional information:
Month Sales Net Salaries Expenses Salary Deductions
April 850,000 430,000 210,700 39,400
May 900,000 500,000 221,500 48,400
June 1,250,000 650,000 297,500 49,480
July 1,520,000 720,000 277,200 58,700
August 1,650,000 740,000 287,500 52,750
September 1,800,000 770,000 292,700 57,650
October 1,400,000 770,000 292,700 57,650

To prepare the monthly cash budget for the third quarter, the cash inflows and outflows for July, August, and September must be calculated based on the data provided. The breakdown includes sales collections, purchases, salary payments, loan repayments, and other outflows such as bank charges.

Explanation:

  1. Sales Collections: Sales are split into cash (20%) and credit (80%). The credit collections are split into three months: 60% in the first month, 20% in the second month, and the remainder (minus bad debt and discounts) in the third month.
  2. Purchases: 60% of sales value is allocated for purchases, with payments split into 70% for the same month and 30% for the next month (with a 2% discount on the total).
  3. Loan Repayment: The N500,000 loan will start accruing 1% interest in August, and repayments are spread over 12 months.
  4. Salaries: Salary payments and deductions are accounted for in each month.
  5. Bank Charges: Calculated at 1% of total cash outflows for each month.

The full cash budget would detail these figures month by month, showing the net inflows and outflows to arrive at the closing cash balance each month.

  • 20 Marks

MI – May 2015 – L1 – SB – Q1 – Budgeting

Prepare a cash budget for a three-month period based on sales, purchases, loan, and other projections.

WHYME LIMITED is engaged in the manufacturing and sales of fast-moving consumer products. The following data are projections for a period of six months:

Month Sales (N’000) Purchases (N’000) Salaries (N’000) Staff Salary Deductions (N’000) Overheads (N’000)
Jan 9,600 5,400 1,650 78 1,650
Feb 15,800 12,000 1,760 82 1,920
March 16,000 10,000 1,760 90 2,100
April 17,600 11,000 1,789 89 2,400
May 14,800 11,200 1,842 92 1,860
June 14,200 9,800 1,800 85 1,720

Other additional information:

  1. Sales are 25% on cash basis, 55% is collected in the month following sales, and the balance in the third month.
  2. All purchases are on 30 days credit while 20% of overheads are paid in the same month, with the balance in the following month.
  3. Net salaries will be paid in the same month, while statutory deductions are remitted on the 10th day of the following month.
  4. A N10 million loan will be released in March to finance the purchase of a new asset costing N12 million in the same month. The loan will be repaid equally over four months starting from April. (Ignore interest).
  5. An old asset will be disposed of in April for N1.5 million.
  6. Cash balance as at the end of February will be N6.5 million, with N2.5 million put into a short-term investment in March at a 2% monthly interest rate, credited at the beginning of the following month.

Required:
Prepare a cash budget for the period of March to May. (Ignore taxation).
(20 Marks)

WHYME LIMITED
CASH BUDGET FOR THREE MONTHS ENDING MAY YEAR XXX

March (N’000) April (N’000) May (N’000)
INFLOWS
Sales Collections 14,610 16,360 16,580
Loan 10,000 – –
Fixed Asset Disposal – 1,500 –
Investment Income – 50 50
Total Inflows (A) 24,610 17,910 16,630
OUTFLOWS
Purchases 12,000 10,000 11,000
Salaries 1,670 1,700 1,750
Salaries Deductions 82 90 89
Overheads 1,956 2,160 2,292
Fixed Assets 12,000 – –
Loan Repayment – 2,500 2,500
Investment 2,500 – –
Total Outflows (B) 30,208 16,450 17,631
Balance B/F 6,500 902 2,362
Net Cash Flow (A – B) (5,598) 1,460 1,001
Balance C/F 902 2,362 1,36

 

Workings

  • 10 Marks

MA – July 2023 – L2 – Q3b – Cash budgets and master budgets

Prepare a monthly cash budget for the first quarter of 2023 for GoGo Ltd, including debtors collection and creditors payment schedules.

b) An extract from the accounts of GoGo Ltd for the last quarter of 2022 is as follows:

The selling price for the products is expected to be GH¢2.5 for the first quarter of 2023. Generally, 60% of sales is collected in the month of sale while 35% is collected in the following month, with the remaining debts declared as bad thereon. The company introduced a debt recovery strategy in the third quarter of 2022 which yielded a collection of 75% of outstanding debts in the first month after being declared as bad debt.

ii) One kilogramme of the raw material can be used to produce two products. A kilogramme of the raw material cost GH¢1.30. Due to an anticipated shortage in raw materials, the company plans to pay for all purchases of raw materials, one month ahead of time.

iii) Wages and variable production overheads are charged at GH¢0.50 and GH¢0.25 respectively per unit produced. Wages and all overheads are paid in the month in which they are incurred. Included in fixed overheads is a monthly depreciation of GH¢750. All other owings are due for payment in the month of January.

Required: Prepare the monthly cash budget for the first quarter of 2023, showing the sub-totals.

  • 10 Marks

MA – Nov 2021 – L2 – Q3b – Cash Budgets and Master Budgets

Extract the cash budget for the second quarter showing the cash balance for each month.

b) The budgeted Income Statement for Zeedan Company for the year 2020 is presented below.

Description GH¢
Sales revenue 930,000
Cost of sales 558,000
Gross profit 372,000
Total expenses 225,000
Net profit 147,000

Notes:
i) Monthly sales in each quarter are the same. The sales for January are GH¢50,000 and this will remain unchanged up to March when it will increase by GH¢20,000 from April and remain unchanged for the remaining two months in the quarter. Third quarter monthly sales will be GH¢90,000 each while those of the fourth quarter are GH¢100,000 each.
ii) 20% of all sales are on a cash basis, 40% of the monthly sales are paid in the month after sales, and the balance is paid the second month after sales. No bad debt is expected.
iii) The monthly cost of sales represents 60% of the current month’s sales. Inventory is kept at 60% of the following month’s cost of sales. All purchases are paid in full after one month.
iv) Included in the expenses is a depreciation of GH¢87,000. The monthly expenses paid as and when incurred are GH¢10,000. This is fixed in January but increased by 20% effective April.

Required:
Extract the Cash Budget for the second quarter of the year, showing the cash balance for each month in the quarter.

(10 marks)

Cash Budget for the Second Quarter

Description April (GH¢) May (GH¢) June (GH¢)
Receipts
Cash Sales 14,000 14,000 14,000
Debtors 40,000 48,000 56,000
Total Receipts 54,000 62,000 70,000

| Payments | | | |
| Purchases | 37,200 | 42,000 | 42,000 |
| Expenses | 12,000 | 12,000 | 12,000 |
| Total Payments| 49,200 | 54,000 | 54,000 |

| Net Cash Flow (NCF) | 4,800 | 8,000 | 16,000 |
| Bal b/d | 2,000 | 6,800 | 14,800 |
| Bal c/d | 6,800 | 14,800 | 30,800 |

Debtors Collection Schedule

Sales (GH¢) Jan Feb March April May June July
Cash Sales 10,000 10,000 10,000 14,000 14,000 14,000 18,000
Debtors
Jan bal 20,000
Feb 20,000
March 20,000
April 28,000
May 28,000
Total Receipts 54,000 62,000 70,000

Creditors Payment Schedule

Description March (GH¢) April (GH¢) May (GH¢) June (GH¢) July (GH¢)
Cost of Sales 60% 30,000 42,000 42,000 42,000 54,000
Add: Closing Stock 25,200 25,200 25,200 32,400
Total 55,200 67,200 67,200 74,400
Less: Opening Stock 18,000 25,200 25,200 25,200
Purchases 37,200 42,000 42,000 49,200
Payment 37,200 42,000 42,000 49,200

Monthly Expenses Schedule

Description GH¢
Total 225,000
Less: Depreciation 87,000
Net Total 138,000
1st Quarter (10,000 × 3) 30,000
Remaining 108,000
Monthly Expenses (108,000 ÷ 9) 12,000

(10 marks)

  • 20 Marks

MA – Nov 2015 – L2 – Q2 – Budgetary control

Prepare budgeted income statement, statement of financial position, and cash budget for Brofre Limited for the first quarter.

Brofre Limited retails fertilizer to farmers in Ghana. The company has approached its bankers to provide funding for next year’s operations, and a three-month master budget has been requested for review by the bankers.

You have been approached by the management as a consultant to prepare the 1st quarter budget for the banker’s consideration for its next year’s operations.

End of Accounting year December 2014:

Item GHS
Debtors 23,000
Bank balance 55,000
Fixed asset at cost 698,000
Provision for depreciation 98,000
Creditors Balance 48,000
Operating expenses (Dec) 60,000
Sales (Dec) 400,000
December Ending Inventory 20,000
Retained earnings 120,000

Additional information provided:

  1. Depreciation is provided at the rate of 5% on the cost of non-current assets.
  2. Closing inventory is expected to increase by GHS 2,000 in January from December levels. This is expected to increase by the same figure in February from the projected figure in January. It is expected that in March, closing inventory is desired to be GHS 26,000.
  3. The company makes a profit of 25% on its sales.
  4. Operating expenses are expected to increase by 10% from that of December and this is projected to increase at the same growth rate until March.
  5. Sales are projected to grow by 15% from December until March.
  6. The Debtors figure is desired to be proportional to the sales values.
  7. Creditors value for the three months is expected to be as follows: January – GHS 50,000; February – GHS 46,000; March – GHS 52,000.

You are required as a consultant for Brofre Limited to prepare for their bankers:

a) The budgeted income statement for the three months. (7 marks)
b) The budgeted statement of financial position for the three months. (7 marks)
c) The cash budget for the three months. (6 marks)
(Total = 20 marks)

a) Budgeted Income Statement for Brofre Limited:

Item December 2014 January 2015 February 2015 March 2015
Sales 400,000 460,000 529,000 608,350
Opening Stock 20,000 22,000 24,000
Purchases 347,000 398,750 458,263
Cost of Goods Available 367,000 420,750 482,263
Less Closing Stock 22,000 24,000 26,000
Cost of Sales 345,000 396,750 456,263
Gross Profit 115,000 132,250 152,088
Operating Expenses 60,000 66,000 72,600 79,860
Depreciation 34,900 34,900 34,900
Total Expenses 100,900 107,500 114,760
Net Profit 14,100 24,750 37,327

b) Budgeted Statement of Financial Position for Brofre Limited:

Item December 2014 January 2015 February 2015 March 2015
Non-Current Assets
Fixed Assets at Cost 698,000 698,000 698,000 698,000
Less Depreciation 98,000 132,900 167,800 202,700
Book Value 600,000 565,100 530,200 495,300
Current Assets
Stock 20,000 22,000 24,000 26,000
Debtors 23,000 26,450 30,418 34,980
Cash Balance 55,000 100,550 150,233 221,897
Total Current Assets 98,000 149,000 204,650 282,878
Total Assets 698,000 714,100 734,850 778,178
Current Liabilities
Creditors 48,000 50,000 46,000 52,000
Equity
Owners Capital 530,000 530,000 530,000 530,000
Retained Earnings 120,000 134,100 158,850 196,178
Total Equity and Liabilities 698,000 714,100 734,850 778,178

c) Cash Budget for Brofre Limited:

Item January 2015 February 2015 March 2015
Cash Inflows:
Cash Received from Debtors 456,550 525,033 603,787
Cash Outflows:
Payment to Creditors 345,000 402,750 452,263
Operating Expenses 66,000 72,600 79,860
Total Cash Outflows 411,000 475,350 532,123
Net Cash Flow 45,550 49,683 71,665
Opening Cash Balance 55,000 100,550 150,233
Closing Cash Balance 100,550 150,233 221,897

Workings:

Debtors:

Item January 2015 February 2015 March 2015
Balance B/F 23,000 26,450 30,418
Add Sales 460,000 529,000 608,350
Less Closing Debtors -26,450 -30,418 -34,980
Cash Received 456,550 525,033 603,787

Creditors:

Item January 2015 February 2015 March 2015
Balance B/F 48,000 50,000 46,000
Add Purchases 347,000 398,750 458,263
Less Closing Creditors -50,000 -46,000 -52,000
Cash Paid 345,000 402,750 452,263
  • 40 Marks

CSEG – May 2016 – L2 – Q1 – Analysing the external environment | Analysing the internal environment

Conduct strategic analysis and prepare cash budget for Richward Ltd, a small haulage contracting company, addressing competitive forces, SWOT, and financial planning.

ICHWARD LIMITED

Background Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.

Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.

In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.

Acquisition of land One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet.

Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.

Accounting Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.

Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.

The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.

One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.

In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.

Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.

Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.

Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.

The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems.

Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).

Required: a) Assess the nature of competitive forces of Richward Ltd. (8 marks)

b) Present a SWOT Analysis for Richward Ltd. (8 marks)

c) Advise Mr. Bonku on the strategic management accounting information which should be provided to assist future decision making and cost control. (8 marks)

d) Prepare a cash budget for Richward Ltd Limited for the six months ending 30th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods. (6 marks)

e) Redraft your cash budget to reflect the suggested alterations to these planned periods. (5 marks)

f) Suggest what other aspects Richward Ltd Limited should consider to solve the expected cash flow problem, should the suggested solution be unachievable. (5 marks)

a) The five competitive forces related to the business of Richward Ltd care:

  1. Rivalry amongst existing competitors Richward Ltd faces strong competition for haulage contract work and it appears that there are several firms operating in the market. Profit margins are low, which indicates that work is undertaken at low prices. A major customer, Grace Ltd, uses other haulers, which suggests that competition for business is fierce. Richward Ltd is facing strong competition from existing competitors. The strong nature of competition is also exacerbated by low switching costs of customers.
  2. Threat of a new market entrant The main constraints on setting up a road haulage business will be obtaining a license and having sufficient capital to purchase or lease a tractor unit and trailer. Finance for such an operation will be readily available. The only other significant entry barrier might be low profit margins. It appears that, overall, the road haulage industry has few major entry barriers so this will always be a threat to established business such as Richward Ltd.

Note: Any of the points under barriers to entry that is well explained may considered – capital requirements, low switching costs of customers, degree of differentiation, economies of scale, knowledge requirements, etc.

  1. The power of customers The customer of Richward Ltd will be primary organisations that employ skilled people who know the road haulage industry and how to negotiate contracts. As there are many competing businesses in the trade, this puts the customers in a strong bargaining position. This is shown by the fact that Richward Ltd’s major customer Grace is using other hauliers and is, no doubt, assessing its supplier’s prices and performance. The power of customers in the market is strong; this poses a serious threat to Richward Ltd.

Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.

  1. Power of suppliers The main suppliers to Richward Ltd will provide vehicles, other plan and equipment, formal services and labour. It is unlikely that any supplier is in a strong monopolistic situation, except possible providers of capital. Richward Ltd is in an established position and while it remains profitable will probably be able to obtain reasonable amounts of capital. The power of suppliers does not appear to be very strong.
  2. The threat of a substitute product The main substitute for road haulage services is freight carried by the railway industry. The current dire state of this industry means that rail freight cannot be considered a serious threat to Richward Ltd.

Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.

Overall, Richward Ltd’s competitive position is not strong as it faces a number of competitive threats.

b) SWOT Analysis for Richward Ltd.

Strength

  • Richward Ltd is an established business with an experienced management team
  • Bonku lives on site enabling Richward Ltd to offer a 24-hour service to customers
  • The company acquired a lease on a new site that has quite a lot of potential
  • The company has diversified into truck driver training which reduced dependence on read haulage for income.
  • Replacement of old trucks and other equipment. This increases the efficiency of operations.

Weaknesses

  • Richward Ltd’s existing site is too small, so it will have to locate the new site that requires more capital and will disrupt business operations.
  • Richward Ltd currently does not have an effective management accounting system, which means Richward Ltd’s managers make decision without having sufficient information
  • The company is too dependent on Grace Ltd, which account for majority of its business

Opportunities

  • The enlarged premises will enable the company to attract new business and offer new services e.g. overnight trailer parking and a vehicle repair service.
  • Richward Ltd should be able to establish stronger links with existing customers, which should help to retain their business.
  • Location of land/business premises.

Threat

  • The most serious threat facing Richward Ltd is the loss of Grace Ltd’s custom. In the last two months one third of this business has already been lost.
  • There are a large number of competitors working on low profit margins and this forces price down. There appears to be little prospect of Richward Ltd being able to increase its prices.
  • Local residents are opposing operations from the current site and the company is receiving bad publicity in the local press.

c) Advice to Mr. Bonku

Competitor Information

  • Information about competitors can be very useful as it provides a benchmark against which Richward Ltd’s performance can be compared.
  • Budgeting will provide information to forecast patterns and trends. This will be very useful when making decisions and setting objectives and targets e.g. market growth rates.

Financial information

  • Investment appraisal Information can be provided to evaluate each capital investment project undertaken by Richward Ltd. This will be very useful when developing the new site.
  • Variance analysis This is a very important management accounting control tool. The expected costs and revenues will be forecast and actual costs and revenues compared with them. Variances can then be identified and investigated to find their cause. This will establish some of Richward Ltd’s strengths and weaknesses.
  • Customer account profitability Costs incurred by Richward Ltd can be related to each customer and the profit generated by each customer calculated. This will be very important information used by Richward Ltd’s managers to make decisions relating to each customer e.g. Grace Ltd.
  • Quoting prices Most of Richward Ltd’s customers will be other organisations. They will expect a price to be agreed before awarding a contract to a supplier. Management accounting can supply the information for quoting competitive and realistic prices when negotiating with customers.

d) RICHWARD LTD: CASH BUDGET FOR SIX MONTHS ENDING NOVEMBER 2016

e)

f) Suggested ways of improving the cash situation of Richward Ltd

  • Raising new capital
  • Ploughing back profits
  • Raising new loans
  • Leasing or renting non-current assets instead of buying them
  • Raising prices
  • Selling for cash
  • Asking for a extended period from creditors
  • Cutting down costs
  • 20 Marks

IMAC – DEC 2022 – L1 – Q2 – Budgeting

Preparation of a flexible budget and addressing negative cash balances in a cash budget.

a) A cash budget is an estimation of the cash flows of a business over a specific period of time. This budget is used to assess whether an entity has sufficient cash to continue operating over a given time frame. The cash budget provides a company with insight into its cash needs (and any surplus) and helps to determine an efficient allocation of cash.

Required:
Identify THREE (3) ways a business can address negative monthly cash balances in a cash budget. (6 marks)

b) The following budget report was prepared for the second quarter of 2022.

Budget Actual Variance
Production Level 6,000 units 7,200 units
Revenue and Cost: GH¢ GH¢ GH¢
Sales 120,000 140,600 20,600 F
Direct Material (30,000) (39,600) 9,600 A
Direct Labour (24,000) (25,920) 1,920 A
Variable Overheads (12,000) (21,600) 9,600 A
Semi-Variable Overheads (30,000) (34,600) 4,600 A
Profit 24,000 18,880 5,120 A

The budgeted fixed overhead cost in the semi-variable overhead cost was GH¢12,000.

Required:
Prepare a budget report using the flexible budget for the second quarter of 2022. (14 marks)

a) Managing shortfall in cash budget:

  • Review sales terms to encourage early payment.
  • Defer the purchase of fixed assets.
  • Reschedule the payment of fixed assets bought.
  • Negotiate trade terms with suppliers for a longer credit period.
  • Discount some short-term investments.
  • Inject additional cash.

b) Preparation of flexible budget:

Budget Flexed Budget Actual Variance
Production (units) 6,000 7,200 7,200 1,200
GH¢ GH¢ GH¢ GH¢ GH¢
Sales 120,000 144,000 140,600 3,400 A
Direct Material (30,000) (36,000) (39,600) 3,600 A
Direct Labour (24,000) (28,800) (25,920) 2,880 F
Variable Overheads (12,000) (14,400) (21,600) 7,200 A
Semi-variable Overheads (30,000) (33,600) (34,600) 1,000 A
Profit 24,000 31,200 18,880 12,320 A
  • 20 Marks

IMAC – NOV 2020 – L1 – Q2 – Cash Budgeting and Working Capital

Prepare cash budget for FG Ltd; explain the usefulness of cash budgets and calculate the cash operating cycle.

a) FG Ltd is preparing its cash budget for January, February, and March 2020. Budgeted data are as follows:

November December January February March
Sales (Units) 750 800 800 850 900
Production (Units) 800 800 850 900 950
Direct labour & variable overhead incurred GH¢48,000 GH¢48,000 GH¢51,000 GH¢54,000 GH¢57,000
Fixed overhead incurred (excluding depreciation) GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000
  • The selling price per unit is GH¢200. The purchase price per kg of raw material is GH¢25. Each unit of finished product requires 2kg of raw materials which are purchased on credit in the month before they are used in production. Suppliers of raw materials are paid one month after purchase.
  • All sales are on credit. 80% of customers pay one month after sale and the remainder pays two months after sale.
  • The direct labour cost, variable overheads, and fixed overheads are paid in the month in which they are incurred.
  • Machinery costing GH¢100,000 will be delivered in February and paid for in March.
  • Depreciation, including that on the new machinery, is as follows:
    • Machinery and equipment GH¢3,500 per month
    • Motor vehicle GH¢800 per month

The opening cash balance on 1 January is estimated to be GH¢15,000.

Required:
i) Prepare a cash budget for each of the three months January, February, and March. (12 marks)
ii) State and explain FOUR (4) usefulnesses of cash budgets. (4 marks)

b) A company’s sales revenue for the year just ended was GH¢28 million. The company earned a gross margin of 40% on sales. All sales and purchases were on credit.

The following balances have been extracted from the year-end accounts:

  • Inventory: GH¢4 million
  • Accounts receivable: GH¢6 million
  • Accounts payable: GH¢3 million

Required:
Calculate, to the nearest whole number, the company’s cash operating cycle based on the year-end figures. (4 marks)

Answer:
a)
i) Cash Budget for FG Ltd (January to March 2020)

Month January February March
Receipts
Credit sales (80% previous month) 128,000 128,000 136,000
Credit sales (20% two months ago) 30,000 32,000 32,000
Total Receipts 158,000 160,000 168,000
Payments
Purchases 42,500 45,000 47,500
Labour & overheads 71,000 74,000 76,000
Machinery – – 100,000
Total Payments 113,500 119,000 223,500
Net Cash Flow 44,500 41,000 (55,500)
Opening Balance 15,000 59,500 100,500
Closing Balance 59,500 100,500 45,000
(12 marks evenly spread using ticks)

ii) Usefulness of Cash Budgets

  1. Cash Flow Management: Helps in managing cash flows by providing a forecast of cash inflows and outflows, ensuring that the company has sufficient cash to meet its obligations.
  2. Decision Making: Assists management in making critical decisions, such as arranging for additional financing or investing surplus cash.
  3. Planning: Enables planning for future cash needs, such as major expenditures or expansion plans.
  4. Control: Provides a benchmark against which actual cash flows can be compared, allowing for monitoring and control of cash flows.
    (Any 4 points for 1 mark each) (4 marks)

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