This budget is used to assess whether the entity has sufficient cash to continue operating over the given time frame. The cash budget provides a company insight into its cash needs and helps to determine an efficient allocation of cash. We can learn about the total amount of cash receipts and payments, the cash balance at a given time, and the total amount of cash purchase and sale. A company produces component A which is used in its normal production.
- It is company policy to pay suppliers for materials three months after receipt.
- In March the company will have quite a substantial cash surplus and the directors will consider investing this cash to maximise the benefit to the company.
- The company expects 1,000 pairs of shoes to be in the beginning inventory, which means a minimum of 4,000 pairs must be produced in July.
- The required documents, such as the budget manual, should be well-written and indexed.
- The cash budget provides a company insight into its cash needs and helps to determine an efficient allocation of cash.
- A cash roll forward computes the cash inflows and outflows for a month, and it uses the ending balance as the beginning balance for the following month.
Cash budgets can be viewed as short-term cash budgets, usually, a time frame of weeks to months, or long-term cash budgets, which are viewed as years. This method is followed for the preparation of a long-term cash budget. The basis of preparation under this method is the profit & loss account. The assumption under this method is that all the increase and decrease in cash balance is the profit/loss of the business. 9) A budgeted balance sheet is prepared in Projected Balance sheet method and an estimate is made of the values of all assets including bank overdraft, cash balance and bank. The other overhead comprising both fixed and variable overhead is allocated as GH¢36800 plus 10% of direct labour cost.
During the coming period, the company is considering whether or continue the manufacturing of the component or buy it from external source. The bought-in- price quotation received from the external supplier is GH¢8 per component. The marginal cost of producing the component is GH¢6 per unit of the component which will be produced on a machine currently working at full capacity. The finished product is currently sold at GH ¢100 per unit with a total cost of GH¢75 per unit in which GH¢15 per unit represent a fixed cost. However, the production budget cannot be prepared directly from the sales budget without a consideration of inventory policy.
What Do You Understand by Zero-Base Budgeting?
Bad debts will never be received in cash and doubtful debts may not be received. When you are forecasting the cash receipts from customers you must remember to adjust for these items. Management decisions will have been taken concerning such factors as inventory policy, credit policy, selling price policy and son on. All of these plans will be designed to meet the objectives of the organization.
Finally the cash budget can be used to monitor and assess performance. It is a continuously updated budget that adds a new budget period when the most recent one ends. It, therefore, represents an extension of the existing budget, which gives the business an extra year. It allows the organization to revise budget assumptions for the last period, thereby achieving proper planning. However, a rolling budget may give rise to a hardly-achievable budget since it mainly focuses on additions and not revisions. A flexible budget can be restructured to capture a change in the activity levels.
Actual results for June 2014 were as follows; 485 units of the product were produced and sold at GHȼ9 per unit. Material consumed in production amounts to 280 kg at a cost of GHȼ980 and labour cost of GHȼ1680 for 672 hours was incurred. Zero-based budgeting was developed as an alternative to the incremental approach. ZBB is a ‘method of budgeting that requires all costs to be specifically justified by the benefits expected’. A cash budget can give forewarning of potential problems that could arise so that managers can be prepared for the situation or take action to avoid it. Production budget, in units; Material usage budget, in kilos; Material purchases budget, in kilos and GH¢; Direct labour budget, in hours and GH¢.
It further eliminates activities that do not align with the key ones as the managers are expected to only focus on the critical activities. Lastly, this type of budgeting helps a company focus on its missions as it sparks a discussion among the top management on the company’s missions and how they can be achieved. Most companies prepare only one budget scenario, which poses its fair share of disadvantages. Some also prepare two extras, which like the first instance, come with given shortcomings.
Failure to identify the principal budget factor at an early stage could lead to delays at a later stage when managers realize that the targets they have been working with are not feasible. The principal budget factor is the factor which limits the activities of the organization. The early identification of this factor is important in the budgetary planning process because it indicates which budget should be prepared first.
The cash budget can also be used to help prepare the budgeted statement of financial position, part of the company’s master budget. A proportion of materials are purchased before they are required for manufacture and therefore there will be a material inventory at the end of March equal to 50% of April’s sales requirements. If April’s sales are forecast to be $700,000 then the material inventory will be $87,500 ($700,000 x 0.25 x 0.50). The cash budget consists of sources of cash and uses of cash. The sources of cash section comprises the beginning cash balance, cash receipts from cash sales, accounts receivable collections, and the sale of assets.
:: Define Budgetary Control?
It helps to provide accurate forecasts without using theoretical data since they are based on what occurred. Cash forecasts will include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined. The preparation of cash budget has been explained in Illustrations 1 and 2. On the expense side, ABC must also calculate the production costs required to produce the shoes and meet customer demand. The company expects 1,000 pairs of shoes to be in the beginning inventory, which means a minimum of 4,000 pairs must be produced in July. If the production cost is $50 per pair, ABC spends $200,000 ($50 x 4,000) in the month of July on the cost of goods sold, which is the manufacturing cost.
This usually empowers managers to control numbers if the achievement of the budgeted numbers is linked to performance appraisals and bonuses. A zero-base budget calls for managers to justify all their budgeted expenditures and is, therefore, more thorough. It departs from the common practice of managers only justifying incremental budgetary changes or result changes from the preceding year. This budgeting method assumes that a manager has an expenditure baseline of zero. Fixed budget includes only fixed costs, whereas a flexible budget includes fixed costs, variable costs and semi variable costs.
For example, management may plan to increase finished goods inventory. Production quantities would then have to be higher than the budgeted sales level. In cash budget, first of all, we estimates our all incomes like cash from sales, cash from interest, dividends and other receipts.
In practice, most organizations carry out some form of updating process on all their budgets, so that the budgets represent a realistic target for planning and control purposes. The formalized budgetary planning process will still be performed on a regular basis to ensure a coordinated approach to budgetary planning. You are told that both achieve profits of GH¢1,000 during the year. A formalized plan will help to ensure a coordinated approach, and the planning process itself will force managers to continually think ahead, planning and reviewing their activities in advance. Budgeting forces managers to appreciate how their activities relate to those of other managers within the organization.
In the coming week, the payments were on time as a clearer picture was painted through the statement and plans were made accordingly to ensure timely payments. DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. Ou are required to prepare a cash budget for each of June, July and August.
What Do You Understand by Budgetary Slack?
The company will not require Stage I if the components are bought from outside. The outsider will supply 50,000 units a year at GH¢4 per unit. The company will have to pay freight of GH¢10,000 per year on purchases.
cost accounting Cash budget questions and answers Management Accounting..Trial Questions
The cash and bank balance on 1st October is expected to be $1,500. I believe that budgetary slack helps in financial reporting and making estimations. cash budget questions and answers Coming up with an outline that incorporates slack can help the company think tank to develop ideas to drive operations within a more limited budget.
A) Indicates probable cash position as a result of planned operations. Okoto Ltd produces and sells a component used in the manufacturing of Laptops. The following is the cost structure of the component based on 50,000 components. Following are the details of the standard cost of the product.
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