6-1
6-38 (30 min.) Cash budgeting, chapter appendix.
Retail outlets purchase snowboards from Skulas, Inc., throughout the year. However, in
anticipation of late summer and early fall purchases, outlets ramp up inventories from May through
August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From
past experience, Skulas’ accountant projects 40% of invoices will be paid in the month invoiced,
45% will be paid in the following month, and 15% of invoices will be paid two months after the
month of invoice. The average selling price per snowboard is $650.
To meet demand, Skulas increases production from April through July because the snowboards
are produced a month prior to their projected sale. Direct materials are purchased in the month of
production and are paid for during the following month (terms are payment in full within 30 days
of the invoice date). During this period there is no production for inventory and no materials are
purchased for inventory.
Direct manufacturing labor and manufacturing overhead are paid monthly. Variable
manufacturing overhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable
marketing costs are driven by the number of sales visits. However, there are no sales visits during
the months studied. Skulas, Inc., also incurs fixed manufacturing overhead costs of $7,500 per
month and fixed nonmanufacturing overhead costs of $4,500 per month.
The beginning cash balance for July 1, 2015, is $14,000. On October 1, 2014, Skulas had a cash
crunch and borrowed $60,000 on a 12% one-year note with interest payable monthly. The note is
due October 1, 2015.
Required:
1. Prepare a cash budget for the months of July through September 2015. Show supporting
schedules for the calculation of receivables and payables.
2. Will Skulas be in a position to pay off the $60,000 one-year note that is due on October 1,
2015? If not, what actions would you recommend to Skulas’ management?
3. Suppose Skulas is interested in maintaining a minimum cash balance of $14,000. Will the
company be able to maintain such a balance during all three months analyzed? If not, suggest
a suitable cash management strategy.
4. Why do Skulas’ managers prepare a cash budget in addition to the revenue, expenses, and
operating income budget?
SOLUTION
Note: This problem is independent of the previous Problem 6-37. All the information needed
to solve Problem 6-38 is given in Problem 6-38. There is no connection between Problem 6–
37 and Problem 6-38.
1. Projected Sales
May
June
July
August
September
October
Sales in units
480
520
750
500
460
440
Revenues (Sales in units × $650)
$312,00
0
$338,00
0
$487,50
0
$325,00
0
$299,000
May
June
July
August
September
October
From sales in:
May (15% $312,000)
$ 46,800
June (45%; 15% $338,000)
152,100
$
50,700
July (40%; 45%; 15% $487,500)
195,000
219,375
$ 73,125
August (40%; 45% $325,000)
130,000
146,250
September (40% $299,000)
119,600
Total
$393,90
0
$400,07
5
$338,975
May
June
July
August
September
October
Budgeted production
750
500
460
440
Direct materials
Wood (board feet)
6,750
4,500
4,140
3,960
Fiberglass (yards)
7,500
5,000
4,600
4,400
Direct manuf. labor (hours)
3,750
2,500
2,300
2,200
Direct materials
Wood
(6,750; 4,500; 4,140 $34)
$229,50
0
$153,000
$140,760
Fiberglass
(7,500; 5,000; 4,600 $9)
67,500
45,000
41,400
Direct manuf. labor
(2,500; 2,300; 2,200 $29)
72,500
66,700
63,800
Interest payment
(12% $60,000 ÷12)
600
600
600
Variable Overhead Calculation
Variable overhead rate
$ 7
$ 7
$ 7
6-3
Overhead driver
(direct manuf. labor-hours)
2,500
2,300
2,200
Variable overhead expense
$
17,500
$
16,100
$ 15,400
Cash Budget for the months of July, August, September 2015
July
August
September
Beginning cash balance
$ 14,000
$ 8,300
$114,975
Add receipts: Collection of receivables
393,900
400,075
338,975
Total cash available
$407,900
$408,375
$453,950
Deduct disbursements:
Material purchases
$297,000
$198,000
$182,160
Direct manufacturing labor
72,500
66,700
63,800
Variable costs
17,500
16,100
15,400
Fixed manuf. and nonmanuf. costs
12,000
12,000
12,000
Interest payments
600
600
600
Total disbursements
399,600
293,400
273,960
Ending cash balance
$ 8,300
$114,975
$179,990
2. Yes. Skulas has a budgeted cash balance of $179,990 on 9/30/2015, and so it will be in a
position to pay off the $60,000 1-year note on October 1, 2015.
3. No. Skulas does not maintain a $14,000 minimum cash balance in July. To maintain a
$14,000 cash balance in each of the three months, it could perhaps encourage its customers to pay
earlier by offering a discount. Alternatively, Skulas could seek short-term credit from a bank.
4. Skulas’ managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Skulas could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Skulas’ managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Skulas’ managers need
to prepare a cash budget in addition to an operating income budget.
6-39 (40–50 min.) Cash budgeting.
On December 1, 2014, the Iaia Wholesale Co. is attempting to project cash receipts and
disbursements through January 31, 2015. On this latter date, a note will be payable in the amount
of $107,000. This amount was borrowed in September to carry the company through the seasonal
peak in November and December.
Selected general ledger balances on December 1 are:
6-4
Sales terms call for a 3% discount if payment is made within the first 10 days of the month after
sale, with the balance due by the end of the month after sale. Experience has shown that 50% of
the billings will be collected within the discount period, 30% by the end of the month after
purchase, and 15% in the following month. The remaining 5% will be uncollectible. There are no
cash sales.
The average selling price of the company’s products is $170 per unit. Actual and projected
sales are:
All purchases are payable within 15 days. Approximately 60% of the purchases in a month are
paid that month and the rest the following month. The average unit purchase cost is $130. Target
ending inventories are 570 units plus 20% of the next month’s unit sales.
Total budgeted marketing, distribution, and customer-service costs for the year are $670,000.
Of this amount, $155,000 are considered fixed (and include depreciation of $43,400). The
remainder varies with sales. Both fixed and variable marketing, distribution, and customer-service
costs are paid as incurred.
Required:
1. Prepare a cash budget for December 2014 and January 2015. Supply supporting schedules for
collections of receivables; payments for merchandise; and marketing, distribution, and
customer-service costs.
2. Why do Iaia’s managers prepare a cash budget in addition to the operating income budget?
SOLUTION
Iaia Wholesale Co.
Statement of Budgeted Cash Receipts and Disbursements
For the Months of December 2014 and January 2015
6-5
December 2014
January 2015
Cash balance, beginning
$ 30,000
$ 4,835
Add receipts:
Collections of receivables (Schedule 1)
503,835
559,470
(a) Total cash available for needs
533,835
564,305
Deduct disbursements:
For merchandise purchases (Schedule 2)
429,940
465,400
For variable costs (Schedule 3)
89,760
97,920
For fixed costs (Schedule 3)
9,300
9,300
(b) Total disbursements
529,000
572,620
Cash balance, end of month (a – b)
$ 4,835
$ (8,315)
Under the current projections, the cash balance as of January 31, 2015, is $(8,315), which is not
sufficient to enable repayment of the $107,000 note.
Schedule 1: Collections of Receivables
Collections in Oct. Sales Nov. Sales Dec. Sales Jan. Sales Total
December 2014 $43,050a $188,700b $272,085c —- $503,835
January 2015 $ 94,350d $168,300e $296,820f $559,470
a0.15 × $287,000 b0.30 × $629,000 c0.50 × $561,000 × 0.97
d0.15 × $629,000 e0.30 × $561,000 f0.50 × $612,000 × 0.97
Schedule 2: Payments for Merchandise
December January
Target ending inventory (in units) 1,290a 1,170c
Add units sold (sales ÷ $170) 3,300 3,600
Total requirements 4,590 4,770
Deduct beginning inventory (in units) 860b 1,290
Purchases (in units) 3,730 3,480
Purchases in dollars (units × $130) $484,900 $452,400
December January
Cash disbursements:
For December: accounts payable on Dec. 1, 2014; $139,000
60% of current month’s purchases 290,940 $271,440
For January: 40% of December’s purchases ________ 193,960
$429,940 $465,400
6-6
a570 units + 0.20 ($612,000 ÷ $170)
b$111,800 ÷ $130
c570 units + 0.20($510,000 ÷ $170)
Schedule 3: Marketing, Distribution, and Customer-Service Costs
Total annual fixed costs, $155,000, minus $43,400 depreciation $111,600
Monthly fixed cost requiring cash outlay $ 9,300
Variable cost ratio to sales =
$670,000 $155,000
$3,218,750
−
= 0.16
December variable costs: 0.16 × $561,000 sales $89,760
January variable costs: 0.16 × $612,000 sales $97,920
2. Iaia’s managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Iaia could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Iaia’s managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Iaia’s managers need to
prepare a cash budget in addition to an operating income budget. For example, the cash budget
helps Iaia’s managers recognize that Iaia will not be able to repay the note in the amount of
$107,000 when it comes due on January 15, 2015. The cash budget prompts Iaia’s managers to
start making other arrangements for this loan, either by extending its terms or borrowing cash from
elsewhere to pay it back.
6-7
6-40 (60 min.) Comprehensive problem; ABC manufacturing, two products.
Hazlett, Inc., operates at capacity and makes plastic combs and hairbrushes. Although the combs
and brushes are a matching set, they are sold individually and so the sales mix is not 1:1. Hazlett’s
management is planning its annual budget for fiscal year 2015. Here is information for 2015:
Hazlett accounts for direct materials using a FIFO cost flow.
6-8
Hazlett uses a FIFO cost flow assumption for finished goods inventory.
Combs are manufactured in batches of 200, and brushes are manufactured in batches of 100. It
takes 20 minutes to set up for a batch of combs and 1 hour to set up for a batch of brushes.
Hazlett uses activity-based costing and has classified all overhead costs as shown in the
following table. Budgeted fixed overhead costs vary with capacity. Hazlett operates at capacity so
budgeted fixed overhead cost per unit equals the budgeted fixed overhead costs divided by the
budgeted quantities of the cost allocation base.
Delivery trucks transport units sold in delivery sizes of 1,000 combs or 1,000 brushes.
Required:
Do the following for the year 2015:
1. Prepare the revenues budget.
2. Use the revenues budget to:
a. Find the budgeted allocation rate for marketing costs.
b. Find the budgeted number of deliveries and allocation rate for distribution costs.
3. Prepare the production budget in units.
4. Use the production budget to:
a. Find the budgeted number of setups and setup-hours and the allocation rate for setup costs.
b. Find the budgeted total machine-hours and the allocation rate for processing costs.
c. Find the budgeted total units produced and the allocation rate for inspection costs.
5. Prepare the direct material usage budget and the direct material purchases budgets in both units
and dollars; round to whole dollars.
6. Use the direct material usage budget to find the budgeted allocation rate for materials-handling
costs.
7. Prepare the direct manufacturing labor cost budget.
8. Prepare the manufacturing overhead cost budget for materials handling, setup, processing, and
inspection costs.
9. Prepare the budgeted unit cost of ending finished goods inventory and ending inventories
budget.
10. Prepare the cost of goods sold budget.
11. Prepare the nonmanufacturing overhead costs budget for marketing and distribution.
12. Prepare a budgeted income statement (ignore income taxes).
13. How does preparing the budget help Hazlett’s management team better manage the company?
6-9
SOLUTION
1.
Revenues Budget
For the Year Ending December 31, 2015
Units
Selling
Price
Total Revenues
Combs
12,000
$ 9
$108,000
Brushes
14,000
$30
420,000
Total
$528,000
2a.
Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs
= $21,150 + $90,000 = $111,150
Marketing allocation rate = $111,150 ÷ $528,000 = $0.2105 per sales dollar
2b.
Total budgeted distribution costs = Budgeted variable distribn. costs + Budgeted fixed distribn. costs
= $0 + $1,170 = $1,170
Combs:
12,000 units ÷ 1,000 units per delivery
12 deliveries
Brushes:
14,000 units ÷ 1,000 units per delivery
14 deliveries
Total
26 deliveries
Delivery allocation rate = $1,170 ÷ 26 deliveries = $45 per delivery
3.
Production Budget (in Units)
For the Year Ending December 31, 2015
Product
Combs
Brushes
Budgeted unit sales
12,000
14,000
Add target ending finished goods inventory
1,200
1,400
Total required units
13,200
15,400
Deduct beginning finished goods inventory
600
1,200
Units of finished goods to be produced
12,600
14,200
6-10
4a.
Combs
Brushes
Total
Machine setup overhead
Units to be produced
12,600
14,200
Units per batch
÷200
÷100
Number of setups
63
142
Hours to setup per batch
×1/3
×1
Total setup hours
21
142
163
Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs
= $10,245 + $16,650 = $26,895
Machine setup
allocation rate
= $26,895 ÷ 163 setup hours = $165 per setup hour
b.
Combs:
12,600 units × 0.025 MH per unit
315 MH
Brushes:
14,200 units × 0.1 MH per unit
1,420 MH
Total
1,735 MH
Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs
= $11,640 + $30,000 = $41,640
Processing allocation rate = $41,640 ÷ 1,735 MH = $24 per MH
c.
Total budgeted inspection costs = Budgeted variable inspection costs + Budgeted fixed inspection costs
= $10,500 + $1,560 = $12,060
Inspection allocation rate = $12,060 ÷ 26,800 units = $0.45 per unit
6-11