Practice: Cash Budget

Orchid Limited make a single product, whose unit budget details are as follows:

	RM	RM
Selling price		100
Less: Costs
Direct material	30
Direct labour	20
Direct production expenses	18
Variable selling expenses	16	(84)
Contribution		16

Additional information:

1. Unit sales are expected to be:

June	July	August	September	October
2,200	1,800	1,000	1,400	2,000

2. Credit sales will account for 60% of total sales. Debtors are expected to pay in the same month following sales for which there will be a cash discount of 3%.

3. Inventory levels will be arranged so that the production in one month will meet the next months sales demand.

4. The purchases of direct materials is one month which will just meet the next months production requirements.

5. Suppliers of direct materials will be paid in the month following purchase.

6. Labour costs will be paid in the month in which they are incurred. All other expenses will be paid in the month following that in which they are incurred.

7. Fixed expenses are RM5,000 per month and include RM360 for depreciation.

8. The bank balance at 1 July 2020 is RM4,100 favourable to the business.

Required:

a) Propose a cash budget for Orchid Limited for the three month period ending on 30 September 2020 showing the balance of cash at the end of each month.

b) Based on the above cash budget information, provide suggestions how will you manage the cash flow to operate Orchid Limited effectively.