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How do I prepare the cash budget for the quarter ended March 31, 20X1?

How do I prepare the cash budget for the quarter ended March 31, 20X1?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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How do I prepare the cash budget for the quarter ended March 31, 20X1?

Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the following sales forecast for the months of January through March 20X1 for its only two products. 50,000 units of J to be sold at $90 each and 30.000 units of K to be sold at $70 each. The desired unit inventories at March 31, 20X1, are 10% of the next quarter's unit sales forecast, which are 60,000 units of J and 30,000 units of K. The January 1, 20X1, unit inventories were 5,000 units of J and 2,000 units of K. Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase cost of B is $5 per pound. Materials A and B on hand at January 1, 20X1, were 19,000 pounds of A and 7,000 pounds of B. Desired inventories at March 31, 20X1, are 14,000 pounds of A and 8,000 pounds of B. Each unit of J requires 0.5 hours of direct labor in the factory; each unit of K requires 1.0 hour of direct labor. The average hourly rate for direct labor is $12 hour. Estimated manufacturing overhead cost is $6 per direct labor hour plus $90.000 per month. Selling and administrative expenses are estimated to be 10% of sales revenue plus $180,000 per month. per Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30% of the credit sales for the quarter ended March 31, 20X1, will occur in January, 30% in February, and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the month of sale and 55% will be collected in the following month. The remainder will be uncollectible. Cash collected in January 20X1 from December 20X0 sales will be $1,050,000. The January 1, 20X1, cash balance was $70,000. The minimum acceptable cash balance at the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of $10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest payment is made the month following the borrowing. Cash disbursements (excluding interest on short-term borrowings) are estimated as follows: January February March $1,500,000 $1,300,000 $1,400,000 Manufacturing costs.... Selling and administrative expenses Interest expense. 390,000 410,000 400,000 90,000 90,000 90,000 210,000 Income tax payment.... 124,000 110,000 50,000 Capital expenditures.. 300,000 Cash dividends....
Transcribed Image Text:Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the following sales forecast for the months of January through March 20X1 for its only two products. 50,000 units of J to be sold at $90 each and 30.000 units of K to be sold at $70 each. The desired unit inventories at March 31, 20X1, are 10% of the next quarter's unit sales forecast, which are 60,000 units of J and 30,000 units of K. The January 1, 20X1, unit inventories were 5,000 units of J and 2,000 units of K. Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase cost of B is $5 per pound. Materials A and B on hand at January 1, 20X1, were 19,000 pounds of A and 7,000 pounds of B. Desired inventories at March 31, 20X1, are 14,000 pounds of A and 8,000 pounds of B. Each unit of J requires 0.5 hours of direct labor in the factory; each unit of K requires 1.0 hour of direct labor. The average hourly rate for direct labor is $12 hour. Estimated manufacturing overhead cost is $6 per direct labor hour plus $90.000 per month. Selling and administrative expenses are estimated to be 10% of sales revenue plus $180,000 per month. per Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30% of the credit sales for the quarter ended March 31, 20X1, will occur in January, 30% in February, and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the month of sale and 55% will be collected in the following month. The remainder will be uncollectible. Cash collected in January 20X1 from December 20X0 sales will be $1,050,000. The January 1, 20X1, cash balance was $70,000. The minimum acceptable cash balance at the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of $10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest payment is made the month following the borrowing. Cash disbursements (excluding interest on short-term borrowings) are estimated as follows: January February March $1,500,000 $1,300,000 $1,400,000 Manufacturing costs.... Selling and administrative expenses Interest expense. 390,000 410,000 400,000 90,000 90,000 90,000 210,000 Income tax payment.... 124,000 110,000 50,000 Capital expenditures.. 300,000 Cash dividends....
Expert Solution
Step 1

A cash budget is a document created to aid in the management of a company's cash flow. A cash budget is created ahead of time and shows all of the anticipated monthly cash incomings (receipts) as well as any anticipated cash outgoings (payments). It can detect any cash shortages. This will enable the company to plan ahead and secure additional cash, such as a bank overdraft. It can aid with budgeting. A cash budget will highlight any months with excessive expenses. It will show whether a company has more cash than expected (surplus) or less cash than projected (deficit) (deficit). This will enable a company to prepare more effectively and make more informed decisions.

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