Assume the following: Animal Gear (AG) does not make any sales on credit.
AG sells only
to the public and accepts cash and credit cards; 90% of its sales are to customers using credit
cards, for which AG gets the cash right away, less a 2% transaction fee.
Purchases of materials are on account. AG pays for half the purchases in the period of the
purchase and the other half in the following period. At the end of March, AG owes suppliers
$8,000.
AG plans to replace a machine in April at a net cash cost of $13,000.
Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month
incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the
manufacturing cost and $10,000 of the nonmanufacturing cost for April.
AG currently has a $2,000 loan at an annual interest rate of 12%. The interest is paid at the
end of each month. If AG has more than $7,000 cash at the end of April it will pay back the loan.
AG owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on
hand at the end of March.
Required:
1. Prepare a cash budget for April for Animal Gear.
2. Why do Animal Gear’s managers prepare a cash budget in addition to the revenue, expenses,
and operating income budget?
SOLUTION
(25 min.) Cash budget (Continuation of 6-40) (Appendix)
Cash Budget
April 30
Cash balance, April 1 $ 5,900
Add receipts
Cash sales ($178,400 × 10%) 17,840
Credit card sales ($178,400 × 90% × 98%) 157,349
Total cash available for needs (x) $181,089
Deduct cash disbursements
Direct materials ($8,000 + $20,024 × 50%) $ 18,012
Direct manufacturing labor 27,300
Manufacturing overhead ($109,832 ─ $25,000 depreciation) 84,832
Nonmanufacturing salaries 16,800
Sales commissions 1,784
Other nonmanufacturing fixed costs ($16,000 ─ $10,000 depreciation) 6,000
Machinery purchase 13,000
Income taxes 5,000
Total disbursements (y) $172,728
Financing
Repayment of loan $ 2,000
1 20
Interest at 12% ($2,000 12% 12 )
Total effects of financing (z) $ 2,020
Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 6,341
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April after the loan is paid is anticipated to be $6,341, which is less than
$7,000 and so Animal Gear would not repay the loan. Under this assumption, the $2,000
repayment would not be shown. Our assumption is that Animal Gear has $8,361 ($181,089 −
$172,728) at the end of April before the loan is paid which is more than $7,000 and so the loan
will be repaid.
2. Animal Gear’s managers prepare a cash budget in addition to the operating income
budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet
payroll, and pay operating expenses as these payments come due. Animal Gear could be very
profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be
delayed and result in insufficient cash being available to make scheduled payments for its
expenses. Animal Gear’s managers may then need to initiate a plan to borrow money to finance
any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so Animal Gear’s managers need to prepare a cash budget in addition to an operating
income budget.
6-42 Comprehensive operating budget. Skulas, Inc., manufactures and sells snowboards.
Skulas manufactures a single model, the Pipex. In late 2017, Skulas’s management accountant
gathered the following data to prepare budgets for January 2018:
Skulas’s CEO expects to sell 2,900 snowboards during January 2018 at an estimated retail price
of $650 per board. Further, the CEO expects 2018 beginning inventory of 500 snowboards and
would like to end January 2018 with 200 snowboards in stock.
Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also
$81,000 in fixed manufacturing overhead costs budgeted for January 2018. Skulas combines
both variable and fixed manufacturing overhead into a single rate based on direct manufacturing
labor-hours. Variable marketing costs are allocated at the rate of $250 per sales visit. The
marketing plan calls for 38 sales visits during January 2018. Finally, there are $35,000 in fixed
nonmanufacturing costs budgeted for January 2018.
Other data include:
