BKAM3023 Management Accounting II

Topic 2: Budget

Exercise 1

Centennial Corporation is preparing its cash payments budget for next month. The
following information pertains to the cash payments:

a. Centennial Corporation pays for 50% of its direct materials purchases in the
month of purchase and the remainder the following month. Last month’s direct
material purchases were $75,000, while the company anticipates $87,000 of
direct material purchases next month.

b. Direct labor for the upcoming month is budgeted to be $36,000 and will be paid
at the end of the upcoming month.

c. Manufacturing overhead is estimated to be 130% of direct labor cost each month

and is paid in the month in which it is incurred. This monthly estimate includes
$13,000 of depreciation on the plant and equipment.

d. Monthly operating expenses for next month are expected to be $41,000, which
includes $2,500 of depreciation on office equipment and $1,600 of bad debt
expense. These monthly operating expenses are paid during the month in which
they are incurred.

e. Centennial Corporation will be making an estimated tax payment of $7,800 next

month. How much cash will be paid out next month?

Centennial Corporation
Cash Budget
Direct materials (75,000 x 50% + 87,000 x 81,000
50%)
Direct labour 36,000
Manufacturing overhead (36,000 x 130% - 33,800
13,000)
Manufacturing cost 150,800
Operating expenses (41,000 – 2,500 – 36,900
1,600)
Tax payment 7,800
Cash disbursements 195,500

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Exercise 2

Henderson Services, Inc., has $8,300 cash on hand on January 1. The company
requires a minimum cash balance of $7,300. January cash collections are $548,430.
Total cash payments for January are $575,160. Prepare a cash budget for January.
How much cash, if any, will Henderson need to borrow by the end of January?

Henderson Services. Inc.

Cash Budget
January
Beginning cash balance 8,300
+ Cash collection 548,430
Total cash available 556,730
- Cash disbursements 575,160
Excess (Deficiency) (18,430)
Borrowing 25730
Ending cash balance 7,300

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Exercise 3 (Past Year Exam Semester A191)

Lahwun Trading Sdn Bhd (LTSB) has compiled the following data in order to put
together its cash budget for the first quarter of year 2020:

January February March

Sales (units) 10,000 30,000 40,000

Additional information:
(i) The selling price for each unit is RM20. Based on past experience, 40 percent of
the total sales is on credit while the remaining sales are by cash.
(ii) Accounts receivable from credit sales is projected to be collected 40% in current
month; 50% in following month; and the remaining not collectable.
(iii) Inventory purchases costs are estimated to be 60% of sales. They are to be paid
30% in the month of purchase and the remaining 70% in the following month.
(iv) LTSB employs five workers who are paid monthly RM20,000 in total.
(v) Rental and marketing expenses are paid monthly RM35,000.
(vi) Other administrative expenses are RM48,000 (including depreciation of
RM10,000).
(vii) The beginning balance of selected accounts are as follows:
Cash RM28,500
Accounts receivable RM35,000
Accounts payable RM55,000

REQUIRED:

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(a) Prepare a cash budget for January, February, and March of year 2020.

Lahwun Trading Sdn Bhd (LTSB)

Cash Budget
January February March
Beginning cash balance 28,500 31,500 242,500
+ Cash collection
(10,000 x 20 x 60%) 120,000
(30,000 x 20 x 60%) 360,000
(40,000 x 20 x 60%) 480,000
+ Account receivable
[(10,000 x 20 x 40%) x 40% + 35,000] 67,000

[(10,000 x 20 x 40%) x 50% + (30,000 x 20

x 40%) x 40%)] 136,000

[(30,000 x 20 x 40%) x 50% + (40,000 x 20

x 40%) x 40%)] 248,000
Total cash available 215,500 527,500 970,500
- Cash disbursement
Inventory
[(10,000 x 20 x 60%) x 30% + 55,000] 91,000

[(10,000 x 20 x 60%) x 70% + (30,000 x

20 x 60%) x 30%] 192,000

[(30,000 x 20 x 60%) x 70% + (40,000 x

20 x 60%) x 30%] 396,000

Salaries expense 20,000 20,000 20,000

Rental and marketing expenses 35,000 35,000 35,000
Administrative expenses (48,000-10,000)
38,000 38,000 38,000
Total cash disbursements 184,000 285,000 489,000
Ending cash balance 31,500 242,500 481,500

(b) Briefly explain how a business can benefit from cash budget.

A business can anticipate when it has less/more cash balance. This can guide
actions/decisions to borrow/invest cash accordingly.