Cash budgeting, chapter appendix

Retail outlets purchase snowboards from Skulas, Inc., throughout the year. However, in anticipation of late summer and early fall purchases, outlets ramp up inventories from May through August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From past experience, Skulas' accountant projects 40% of invoices will be paid in the month invoiced, 45% will be paid in the following month, and 15% of invoices will be paid two months after the month of invoice. The average selling price per snowboard is $650.
To meet demand, Skulas increases production from April through July because the snowboards are produced a month prior to their projected sale. Direct materials are purchased in the month of production and are paid for during the following month (terms are payment in full within 30 days of the invoice date). During this period there is no production for inventory and no materials are purchased for inventory.
Direct manufacturing labor and manufacturing overhead are paid monthly. Variable manufacturing overhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable marketing costs are driven by the number of sales visits. However, there are no sales visits during the months studied. Skulas, Inc., also incurs fixed manufacturing overhead costs of $7,500 per month and fixed nonmanufacturing overhead costs of $4,500 per month.

The beginning cash balance for July 1, 2015, is $14,000. On October 1, 2014, Skulas had a cash crunch and borrowed $60,000 on a 12% one-year note with interest payable monthly. The note is due October 1, 2015.

Required:
1. Prepare a cash budget for the months of July through September 2015. Show supporting schedules for the calculation of receivables and payables.
2. Will Skulas be in a position to pay off the $60,000 one-year note that is due on October 1, 2015? If not, what actions would you recommend to Skulas' management?
3. Suppose Skulas is interested in maintaining a minimum cash balance of $14,000. Will the company be able to maintain such a balance during all three months analyzed? If not, suggest a suitable cash management strategy.
4. Why do Skulas' managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?

Note: This problem is independent of the previous Problem 6- 37. All the information needed to solve Problem 6- 38 is given in Problem 6- 38. There is no connection between Problem 6- 37 and Problem 6- 38.

1. Projected Sales
May June July August September October
Sales in units 480 520 750 500 460 440
Revenues (Sales in units × $650) $312,000 $338,000 $487,500 $325,000 $299,000

Collections of Receivables
May June July August September October
From sales in:
May (15% ? $312,000) $ 46,800
June (45%; 15% ? $338,000) 152,100 $ 50,700
July (40%; 45%; 15% ? $487,500) 195,000 219,375 $ 73,125
August (40%; 45% ? $325,000) 130,000 146,250
September (40% ? $299,000)

119,600
Total $393,900 $400,075 $338,975

Calculation of Payables
May June July August September October
Material and Labor Use, Units
Budgeted production 750 500 460 440
Direct materials
Wood (board feet) 6,750 4,500 4,140 3,960
Fiberglass (yards) 7,500 5,000 4,600 4,400
Direct manuf. labor (hours) 3,750 2,500 2,300 2,200

Disbursement of Payments
Direct materials
Wood
(6,750; 4,500; 4,140 ? $34) $229,500 $153,000 $140,760
Fiberglass
(7,500; 5,000; 4,600 ? $9) 67,500 45,000 41,400
Direct manuf. labor
(2,500; 2,300; 2,200 ? $29) 72,500 66,700 63,800
Interest payment
(12% ? $60,000 ÷12) 600 600 600

Variable Overhead Calculation
Variable overhead rate $ 7 $ 7 $ 7
Overhead driver
(direct manuf. labor-hours) 2,500 2,300 2,200
Variable overhead expense $ 17,500 $ 16,100 $ 15,400

Cash Budget for the months of July, August, September 2015
July August September
Beginning cash balance $ 14,000 $ 8,300 $114,975

Add receipts: Collection of receivables 393,900 400,075 338,975
Total cash available $407,900 $408,375 $453,950

Deduct disbursements:
Material purchases $297,000 $198,000 $182,160
Direct manufacturing labor 72,500 66,700 63,800
Variable costs 17,500 16,100 15,400
Fixed manuf. and nonmanuf. costs 12,000 12,000 12,000
Interest payments 600 600 600
Total disbursements 399,600 293,400 273,960
Ending cash balance $ 8,300 $114,975 $179,990

2. Yes. Skulas has a budgeted cash balance of $179,990 on 9/30/2015, and so it will be in a position to pay off the $60,000 1-year note on October 1, 2015.

3. No. Skulas does not maintain a $14,000 minimum cash balance in July. To maintain a $14,000 cash balance in each of the three months, it could perhaps encourage its customers to pay earlier by offering a discount. Alternatively, Skulas could seek short-term credit from a bank.

4. Skulas' 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. Skulas 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. Skulas' 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 Skulas' managers need to prepare a cash budget in addition to an operating income budget.