Problem 8-28 (Static) Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-7, LO8-8] Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made. Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget: Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are: Sales Merchandise Purchases Current Year: Fourth quarter actual $ 200,000 $ 126,000 Next year: First quarter estimated $ 300,000 $ 186,000 Second quarter estimated $ 400,000 $ 246,000 Third quarter estimated $ 500,000 $ 305,000 Fourth quarter estimated $ 200,000 $ 126,000 All sales are on account. The company normally collects 65% of a quarter’s sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year’s fourth-quarter actual data. Eighty percent of a quarter’s merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is depreciation. The company will pay $10,000 in dividends each quarter. Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash. The Cash account contained $10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained. The company's bank allows borrowing in increments of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year. At present, the company has no loans outstanding. Required: 1. Calculate the expected cash collections by quarter and in total for next year. 2. Calculate the expected cash disbursements for merchandise purchases by quarter and in total for next year. 3. Calculate the expected cash disbursements for selling and administrative expenses, by quarter and in total for next year.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Problem 8-28 (Static) Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-7, LO8-8]
Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.
Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:
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Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are:
| Sales | Merchandise Purchases |
|||
| Current Year: | ||||
| Fourth quarter actual | $ | 200,000 | $ | 126,000 |
| Next year: | ||||
| First quarter estimated | $ | 300,000 | $ | 186,000 |
| Second quarter estimated | $ | 400,000 | $ | 246,000 |
| Third quarter estimated | $ | 500,000 | $ | 305,000 |
| Fourth quarter estimated | $ | 200,000 | $ | 126,000 |
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All sales are on account. The company normally collects 65% of a quarter’s sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year’s fourth-quarter actual data.
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Eighty percent of a quarter’s merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter.
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Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is
depreciation. -
The company will pay $10,000 in dividends each quarter.
-
Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash.
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The Cash account contained $10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained.
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The company's bank allows borrowing in increments of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year.
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At present, the company has no loans outstanding.
Required:
1. Calculate the expected cash collections by quarter and in total for next year.
2. Calculate the expected cash disbursements for merchandise purchases by quarter and in total for next year.
3. Calculate the expected cash disbursements for selling and administrative expenses, by quarter and in total for next year.
4. Prepare a cash budget by quarter and in total for next year.
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