Question 11.RQ.4: A small manufacturing fi rm is to commence operations on 1 J...
A small manufacturing firm is to commence operations on 1 July. The following estimates have been prepared:
July August September
Sales (units) 10 36 60
Production (units) 40 50 50
Opening inventory (units) NIL
It is planned to have raw material inventories of £10,000 at the end of July, and to maintain inventories at that level thereafter.
Selling prices, costs and other information:
Per unit
£
Selling price 900
Material cost 280
Labour cost 160
Variable overheads 40
Fixed overheads are expected to be £5,000 per month, including £1,000 depreciation. Settlement terms on sales: 10 per cent cash, the balance payable the month following sale. Labour is paid in the month incurred, and all other expenditures the following month.
Requirements
(a) The budgeted cash receipts from sales are:
July £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
August £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
September £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
(b) The budgeted cash payments for raw materials are:
July £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
August £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
September £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ }
(c) The total of the budgeted cash payments for labour and overhead in August is £ \boxed{ \ \ \ \ \ \ \ \ \ \ \ \ \ } .
(d) A cash budget can be used to give forewarning of potential cash problems that could arise so that managers can take action to avoid them. This is known as:
feedforward control \square
feedback control \square
(e) A cash budget is continuously updated to reflect recent events and changes to forecast events. This type of budget is known as a:
flexible budget \square
rolling budget \square
● Remember to exclude depreciation from the fixed overhead figures. Depreciation is not a cash fl ow.
● Read the wording of the question carefully to determine the timing of each cash flow.
(a)
July £900
August £11,340
September £34,560
Workings
£ £
July: 10% × (10 × £900) 900
August: 90% × July sales (10 × £900) 8,100
10% × August sales (36 × £900) 3,240
11,340
September: 90% × August sales (36 × £900) 29,160
10% × September sales (60 × £900) 5,400
34,560
(b)
July £0
August £21,200
September £14,000
Workings:
Cash payments each month are for the previous month’s purchases. Therefore, no payments are made in July.
£ £
August: payment for July closing inventory 10,000
payment for July usage (40 ×£280) 11,200
21,200
September: payment for August usage (50 × £280) 14,000
(c) £13,600
Workings:
£
August labour cost paid in month incurred (50 × £160) 8,000
July variable overhead cost paid in August (40 × £40) 1,600
Fixed overhead cash cost (£5,000 – £1,000 depreciation) 4,000
13,600
(d) This is known as feedforward control.
(e) This type of budget is known as a rolling budget.