Question 11.2: Watson Ltd is preparing its budgets for the next quarter. Th...
Watson Ltd is preparing its budgets for the next quarter. The following information has been drawn from the budgets prepared in the planning exercise so far:
Sales value June (estimate) £12,500
July (budget) £13,600
August £17,000
September £16,800
Direct wages £1,300 per month
Direct material purchases June (estimate) £3,450
July (budget) £3,780
August £2,890
September £3,150
Other information
● Watson sells 10 per cent of its goods for cash. The remainder of customers receive one month’s credit.
● Payments to material suppliers are made in the month following purchase.
● Wages are paid as they are incurred.
● Watson takes one month’s credit on all overheads.
● Production overheads are £3,200 per month.
● Selling, distribution and administration overheads amount to £1,890 per month.
● Included in the amounts for overhead given above are depreciation charges of £300 and £190, respectively.
● Watson expects to purchase a delivery vehicle in August for a cash payment of £9,870.
● The cash balance at the end of June is forecast to be £1,235.
You are required to prepare a cash budget for each of the months July to September.
Watson Ltd cash budget for July to September
| July | August | September | |
| £ | £ | £ | |
| Sales receipts: | |||
| 10% in cash | 1,360 | 1,700 | 1,680 |
| 90% in one month | 11,250 | 12,240 | 15,300 |
| Total receipts | 12,610 | 13,940 | 16,980 |
| Payments | |||
| Material purchases (one month credit) | 3,450 | 3,780 | 2,890 |
| Direct wages | 1,300 | 1,300 | 1,300 |
| Production overheads¹ | 2,900 | 2,900 | 2,900 |
| Selling, distribution and administration | 1,700 | 1,700 | 1,700 |
| overhead¹ | |||
| Delivery vehicle | __ | 9,870 | __ |
| Total payments | 9,350 | 19,550 | 8,790 |
| Net cash inflow/(outflow) | 3,260 | (5,610) | 8,190 |
| Opening cash balance | 1,235 | 4,495 | (1,115) |
| Closing cash balance at the end of the month | 4,495 | (1,115) | 7,075 |
Note 1 : Depreciation has been excluded from the overhead payment figures because it is not a cash item.