You have just been hired as a new management trainee by Terre Inc., a manufactur

Question

You have just been hired as a new management trainee by Terre Inc., a manufacturer of potato chips. In the past, the company did very little in the way of budgeting and at certain times of the year experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming quarter to show management the benefits that can be gained from an integrated budgeting program. To this end, you worked with accounting and other areas to gather the information assembled below.
The company sells a single type of potato chip with a budgeted selling price of $5 per packet. Actual and budgeted sales of potato chip are provided as below (in units):

2017

38,000

From their experience, 30% of the sales are on cash with 10% discount. The remainder are on account. Collections for sales on account follow a stable pattern: 75% of a month's credit sales are collected in the month of sale, and 20% are collected in the month following sale, and the remaining 5% are uncollectible.

Due to the unstable sales, the company has been experienced the shortage of inventory. Hence, you plan to suggest a new inventory policy; the ending inventory for each month should be equal to 30% of the next month's sales in units. This requirement had been met at the end of June.

Each packet of potato chip requires 500g of potato. The company has a policy of maintaining the raw material at the end of each month equal to 20% of the next month's production needs. This requirement had been met at the end of June. Potatoes cost $1.2 per kg. 70% of a month’s purchases is paid for in the month of purchase; the remaining is paid in the following month. At the end of June, the accounts payable balance is $6,400.

Each packet of potato chip requires 0.1 direct labor-hours. Due to the recent increase in minimum wage, factory workers are paid $14 per direct labor-hour.

Terre bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $5 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $40,000 per month. Fixed manufacturing overhead includes depreciation on factory equipment, which is $27,000 per month.

At Terre, the selling and administrative (SG&A) expense budget is divided into variable and fixed components. The variable SG&A expense is $0.8 per unit sold. The budgeted fixed selling and administrative expense is $30,000 per month. This expense includes depreciation on office equipment, which is $10,000 per month.

Due to the recent customer claims on the packaging defects, Terre Inc. has decided to purchase a new packing equipment in August 2017. The new equipment costs $30,000 and will be paid in cash. Terre has declared a cash dividend of $0.50 per share, which will be paid on July 31, 2017. The company has 100,000 common shares outstanding. To finance potential cash deficit, Terre Inc. plans to borrow a $40,000 loan from a local bank in the beginning of July 2017 and repay the loan plus accumulated interest at the end of September 2017. The annual interest rate on the loan is 12% (i.e., 1% per month). At the end of June, the cash balance is $30,000.

Required:

3. Prepare a cash budget, by each month and in total for the 3rd quarter of 2017. Use the simple interest rate (no compounding interest rate needed).

May (Actual) 30,000 June (Actual) 33,000 July (Budgeted) 38,000 August (Budgeted) 42,000 September (Budgeted) 50,000 October (Budgeted) 40,000 November (Budgeted)

38,000

Explanation / Answer

SALES BUDGET: May (Actuals) June (Actuals) July August September Quarter October November Budgeted sales in units (packets) 30000 33000 38000 42000 50000 130000 40000 38000 Cash sales (units*30%*$5*90%) 40500 44550 51300 56700 67500 175500 54000 51300 Credit sales (units*70%*$5) 105000 115500 133000 147000 175000 455000 140000 133000 COLLECTIONS FROM RECEIVABLES: From current month's sales (75%) 99750 110250 131250 341250 From previous months sales (20%) 23100 26600 29400 79100 Total monthly collections from receivables 122850 136850 160650 420350 PRODUCTION BUDGET (Packets): Desired ending inventory 12600 15000 12000 12000 11400 Sales for the month 38000 42000 50000 130000 40000 Total needs 50600 57000 62000 142000 51400 Beginning inventory 11400 12600 15000 11400 12000 Packets to be produced 39200 44400 47000 130600 39400 PURCHASE BUDGET FOR POTATOES: Requirement for production in kgs 19600 22200 23500 65300 Desired ending inventory in kgs 4440 4700 7880 7880 Total needs 24040 26900 31380 73180 Beginning inventory 3920 4440 4700 3920 Required purchases in kgs 20120 22460 26680 69260 Cost of purchases at $1.2 per kg 24144 26952 32016 83112 CASH DISBURSEMENTS FOR PURCHASES: For the previous month's purchases 6400 7243 8086 21729 For the current month's purchases 16901 18866 22411 58178 Total monthly payments for purchases 23301 26110 30497 79907 CASH BUDGET: Beginning balance of cash 30000 32969 19450 30000 Receipts of cash: Loan from bank 40000 0 0 40000 Cash sales 51300 56700 67500 175500 Collections from receivables 122850 136850 160650 420350 Total cash available 244150 226519 247600 665850 Cash disbursements: Payments for purchases 23301 26110 30497 79907 Wages for labor ($1.4 per packet) 54880 62160 65800 182840 Variable overhead ($5*0.1 per packet) 19600 22200 23500 65300 Fixed manufacturing overhead (cash) 13000 13000 13000 39000 Variable SG&A ($0.8 per unit sold) 30400 33600 40000 104000 Fixed SG&A (cash) 20000 20000 20000 60000 Equipment 0 30000 0 30000 Repayment of the loan 0 0 40000 40000 Interest on the loan 1200 1200 Dividends 50000 0 0 50000 Total disbursements 211181 207070 233997 652247 Cash surplus/(deficit) 32969 19450 13603 13603

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