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- 20 Marks
Question
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)
Answer
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 |
- Tags: Cash Budget, Flexible Budget, Variance Analysis
- Level: Level 1
- Uploader: Joseph