Built-Tight is preparing its master budget for the quarter ended September 30. Budgeted sales and cash payments for product costs for the quarter follow. July August September
Budgeted sales $54,000 $70,000 $58,000
Budgeted cash payments for
Direct material 15,160 12,440 12,760
Direct labor 3,040 2,360 2,440
Factory overhead 19,200 15,800 16,200

Sales are 15% cash and 85% on credit. All credit sales are collected in the month following the sale. The June 30 balance sheet includes balances of $15,000 in cash: $44,000 in accounts receivable; $3,500 in accounts payable; and a $4,000 balance in loans payable. A minimum cash balance of $15,000 is required. Loans are obtained at the end of any month when a cash shortage occurs. Interest is 1% per month based on the beginning-of-the-month loan balance and is paid at each month-end. If an excess balance of cash exists, loans are repaid at the end of the month. Operating expenses are paid in the month incurred and consist of sales commissions (10% of sales), office salaries ($3,000 per month), and rent ($5,500 per month).

Required:

a. Prepare a cash receipts budget for July, August, and September.
b. Prepare a cash budget for each of the months of July, August, and September.

Built-Tight

a) Cash Budget for July, August, and September:

                                        July            August       September    Total

Beginning balance         $15,000    $16,900     $28,700         $15,000

Cash collections:              52,100     56,400        68,200         176,700

Cash Expenses:

Direct materials               (15,160)    (12,440)        (12,760 )        (40,360)

Direct labor                      (3,040)     (2,360)          (2,440)          (7,840)

Factory overhead          (19,200)    (15,800)        (16,200)        (51,200)

Operating expenses:

Sales Commission         (5,400)      (7,000)         (5,800)         (18,200)

Rent Expense                (3,000)      (3,000)         (3,000)          (9,000)

Accounts Payable                           (4,000)                                (4,000)

Interest expense             (400)                                                     (400)

Loan repayment           (4,000)                                                 (4,000)

Minimum Balance        15,000       15,000         15,000

Excess Cash                $1,900      $13,700       $41,700       $56,700

Explanation:

a) Cash Collections:

                                    July            August         September    Total

Cash sales 15%       $8,100         $10,500         $8,700         $27,300

85% a month after 44,000          45,900         59,500         149,400

Total collections   $52,100        $56,400       $68,200      $176,700

b) It is assumed that the balance in accounts payable was paid in August when the company had enough balance to offset it.  Any other assumption could have been made.

c) A cash budget shows the cash receipts and payments made during the budget period.  As a budget, it shows the forecast for cash receipts and payments, which will help management to make decisions to avoid liquidity problems which can ruin a business.  Management is able to plan ahead for the business' expenditures and investments.  It also warns management to negotiate for loans to smoothen periods of cash shortages.

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