Topic: Cash Budgeting and Working Capital

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PM – May 2022 – L2 – SA – Q2 – Cash Budgeting and Working Capital

Preparation of a cash budget for Mega Laboratories PLC for the quarter ending June 30, 2021.

Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.

Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:

(i) At 31 March 2021 various balances were as follows:

  • Receivables: N500,700
  • Creditors (suppliers of Zithromax): N153,000
  • Inventory of vacineDcovid: 20,300 units
  • Inventory of Zithromax: 200,000 kg

(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:

  • Direct material Zithromax, 10kg at N5.00 per kg: N50.00
  • Direct labour, 2 hours at N6.00 per hour: N12.00

(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:

  • 25,000 units of vacineDcovid at a selling price of N95.00 per unit.
    (v) Assume that sales of vacineDcovid and purchases of Zithromax will be evenly spread over the three months to 30 June 2021.
    (vi) Depreciation relating to plant and machinery is N55,000 for the quarter ending 30 June 2021.
    (vii) Other expenses are paid immediately in cash and are estimated to be N200,000 for the quarter ending 30 June 2021.
    (viii) The anticipated inventory levels at 30 June 2021 are as follows:
  • Inventory of vacineDcovid: 15,000 units
  • Inventory of Zithromax: 150,500 kgs

(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.

Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)

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IMAC – NOV 2020 – L1 – Q2 – Cash Budgeting and Working Capital

Prepare cash budget for FG Ltd; explain the usefulness of cash budgets and calculate the cash operating cycle.

a) FG Ltd is preparing its cash budget for January, February, and March 2020. Budgeted data are as follows:

November December January February March
Sales (Units) 750 800 800 850 900
Production (Units) 800 800 850 900 950
Direct labour & variable overhead incurred GH¢48,000 GH¢48,000 GH¢51,000 GH¢54,000 GH¢57,000
Fixed overhead incurred (excluding depreciation) GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000
  • The selling price per unit is GH¢200. The purchase price per kg of raw material is GH¢25. Each unit of finished product requires 2kg of raw materials which are purchased on credit in the month before they are used in production. Suppliers of raw materials are paid one month after purchase.
  • All sales are on credit. 80% of customers pay one month after sale and the remainder pays two months after sale.
  • The direct labour cost, variable overheads, and fixed overheads are paid in the month in which they are incurred.
  • Machinery costing GH¢100,000 will be delivered in February and paid for in March.
  • Depreciation, including that on the new machinery, is as follows:
    • Machinery and equipment GH¢3,500 per month
    • Motor vehicle GH¢800 per month

The opening cash balance on 1 January is estimated to be GH¢15,000.

Required:
i) Prepare a cash budget for each of the three months January, February, and March. (12 marks)
ii) State and explain FOUR (4) usefulnesses of cash budgets. (4 marks)

b) A company’s sales revenue for the year just ended was GH¢28 million. The company earned a gross margin of 40% on sales. All sales and purchases were on credit.

The following balances have been extracted from the year-end accounts:

  • Inventory: GH¢4 million
  • Accounts receivable: GH¢6 million
  • Accounts payable: GH¢3 million

Required:
Calculate, to the nearest whole number, the company’s cash operating cycle based on the year-end figures. (4 marks)

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PM – May 2022 – L2 – SA – Q2 – Cash Budgeting and Working Capital

Preparation of a cash budget for Mega Laboratories PLC for the quarter ending June 30, 2021.

Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.

Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:

(i) At 31 March 2021 various balances were as follows:

  • Receivables: N500,700
  • Creditors (suppliers of Zithromax): N153,000
  • Inventory of vacineDcovid: 20,300 units
  • Inventory of Zithromax: 200,000 kg

(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:

  • Direct material Zithromax, 10kg at N5.00 per kg: N50.00
  • Direct labour, 2 hours at N6.00 per hour: N12.00

(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:

  • 25,000 units of vacineDcovid at a selling price of N95.00 per unit.
    (v) Assume that sales of vacineDcovid and purchases of Zithromax will be evenly spread over the three months to 30 June 2021.
    (vi) Depreciation relating to plant and machinery is N55,000 for the quarter ending 30 June 2021.
    (vii) Other expenses are paid immediately in cash and are estimated to be N200,000 for the quarter ending 30 June 2021.
    (viii) The anticipated inventory levels at 30 June 2021 are as follows:
  • Inventory of vacineDcovid: 15,000 units
  • Inventory of Zithromax: 150,500 kgs

(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.

Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)

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You're reporting an error for "PM – May 2022 – L2 – SA – Q2 – Cash Budgeting and Working Capital"

IMAC – NOV 2020 – L1 – Q2 – Cash Budgeting and Working Capital

Prepare cash budget for FG Ltd; explain the usefulness of cash budgets and calculate the cash operating cycle.

a) FG Ltd is preparing its cash budget for January, February, and March 2020. Budgeted data are as follows:

November December January February March
Sales (Units) 750 800 800 850 900
Production (Units) 800 800 850 900 950
Direct labour & variable overhead incurred GH¢48,000 GH¢48,000 GH¢51,000 GH¢54,000 GH¢57,000
Fixed overhead incurred (excluding depreciation) GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000 GH¢20,000
  • The selling price per unit is GH¢200. The purchase price per kg of raw material is GH¢25. Each unit of finished product requires 2kg of raw materials which are purchased on credit in the month before they are used in production. Suppliers of raw materials are paid one month after purchase.
  • All sales are on credit. 80% of customers pay one month after sale and the remainder pays two months after sale.
  • The direct labour cost, variable overheads, and fixed overheads are paid in the month in which they are incurred.
  • Machinery costing GH¢100,000 will be delivered in February and paid for in March.
  • Depreciation, including that on the new machinery, is as follows:
    • Machinery and equipment GH¢3,500 per month
    • Motor vehicle GH¢800 per month

The opening cash balance on 1 January is estimated to be GH¢15,000.

Required:
i) Prepare a cash budget for each of the three months January, February, and March. (12 marks)
ii) State and explain FOUR (4) usefulnesses of cash budgets. (4 marks)

b) A company’s sales revenue for the year just ended was GH¢28 million. The company earned a gross margin of 40% on sales. All sales and purchases were on credit.

The following balances have been extracted from the year-end accounts:

  • Inventory: GH¢4 million
  • Accounts receivable: GH¢6 million
  • Accounts payable: GH¢3 million

Required:
Calculate, to the nearest whole number, the company’s cash operating cycle based on the year-end figures. (4 marks)

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