Preparing a Cash Budget

The Sable Sisters, manufacturers of fine apparels, prepares monthly cash budgets to aid them in running their business. Relevant data from operating budgets for the upcoming budget period are:

January February

Sales $365,000 $425,800

Direct material purchases 115,100 132,900

Direct labor 91,150 105,600

Manufacturing overhead 71,660 73,850

Selling and administrative expenses 82,000 89,680

All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month following the month of sale, and 20% in the second month following the month of sale. Sixty percent (60%) of the direct materials purchases are paid in cash in the month of purchase, and the remaining balance is paid in the following month. All other items above are paid in the month incurred except for depreciation. The selling & administrative expenses include $1,200 of depreciation per month.

Other information:

1.Sales for November of the prior year total $269,000; December $330,230

2.Purchases for December of the prior year total $102,800.

3.In January, the company expects to sell a piece of equipment for its salvage value of $16,900.

4.In February, the company expects to sell some of its long-term investments for $6,250.

5.In February, the company expects to pay a $4,890 cash dividend.The company expects to start January with cash of $63,820 and wants to always maintain a minimum cash balance of $50,000. In any month where the cash balance falls below $50,000, the company will take out the difference from their line of credit with their local bank, Tom Nook AC Bank. Tom Nook charges 35% interest on all loaned amounts. The Sable Sisters will repay any borrowed funds in the earliest period in which there is a sufficient cash balance.

Requirements:

1.) Prepare the supporting cash budget schedules:

a.) Cash Collections Schedule

b.) Cash Payments Schedule

2.) Prepare a cash budget with columns for January and February.

Check figures:

• Cash Collections Schedule; Total Collections for Jan. should be $335,369
• Cash Payments Schedule; Total Cash Payments for Feb. should be $125,780
• Cash Budget; Excess of Cash should be $62,299 for Jan.
• Cash Budget; Excess of Cash should be $58,395 for Feb.