Cash, financial and flexible budgets

Accounting Ahead | Original study resource | accountingahead.com.au

Cash, financial and flexible budgets

MODULE 3 | PART B.3 | STUDENT COMPANION

The financial budget = budgeted income statement + budgeted balance sheet + cash budget + capital

expenditure budget. The income statement measures profit but ignores timing; the cash budget shows when

cash comes in and goes out.

The cash budget

Blue Wren: cash budget for July $

Opening cash balance 25,000

Add: collections - 40% of July sales ($288,000) 115,200

Add: collections - 60% of June sales ($270,000) 162,000

Cash available 302,200

Less: steel purchased in June (paid in July) (30,000)

Less: wages (70,000)

Less: variable overhead (20,000)

Less: fixed overhead excluding $8,000 depreciation (32,000)

Less: period costs excluding $5,000 depreciation (64,000)

Less: new machine (capital expenditure budget) (60,000)

Closing cash before financing 26,200

Minimum balance policy 40,000

Short-term finance to arrange (rounded) 15,000

Building it: a schedule of collections (how much of each month's sales is collected that month and later), a

schedule of payments for purchases, then other inflows and outflows (interest, dividends, asset sales, tax,

capital spending). Leave out non-cash items such as depreciation.

Profit is not cash

$0

$16,000

$32,000

$48,000

$64,000

$80,000

$65,400

Budgeted operating profit

$1,200

Increase in cash

July, Blue Wren Drinkware (imagined)

Capital spending, inventory build-up and credit sales explain the gap

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Linking the financial budgets

Budget Draws on

Budgeted income statement All operating budgets; adds items such as income tax

Cash budget Collections and payments schedules; capital expenditure budget; financing

Budgeted balance sheet Profit from the income statement; closing inventories; closing cash from the

cash budget

Capital expenditure budget Planned long-term assets for next year and beyond

Decentralised organisations build budgets from the bottom up: each store or region prepares its sales budget;

state managers combine them; head office adds online sales. Each team answers only for its own revenue

budget.

A flexible budget for planning

Flexible overhead budget 1,800 hours 2,000 hours 2,200 hours

Variable overhead ($10 per labour hour) $18,000 $20,000 $22,000

Fixed overhead $40,000 $40,000 $40,000

Total manufacturing overhead $58,000 $60,000 $62,000

Only the variable part moves with activity

Flexible budgets for planning show revenues and costs at several activity levels, giving worst, best and most

likely cases and a reference point if activity differs from plan. (In Part C, flexing is used for control.)

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 3 | PART B.3 | TRY THESE BEFORE THE WORKED ANSWERS

A garden supplies wholesaler (imagined) has sales of: November $80,000; December $90,000; January

$100,000; February $120,000; March $150,000. It collects 30% in the month of sale, 50% the following month

and 18% the month after; 2% is never collected.

Question 1 - Schedule of collections

Collections January February March

30% of this month's sales

50% of last month's sales

18% of the sales two months ago

Total collections

Question 2 - March cash budget

Item $

Opening cash 12,000

Collections (from Question 1)

Payments to suppliers (70,000)

Wages (30,000)

Rent (8,000)

Other cash costs (9,000)

New equipment (25,000)

Depreciation for the month: $3,000 ?

Closing cash before financing

Finance needed to keep a minimum balance of $10,000

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.3 | STUDENT COMPANION

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Question 3 - Flexible delivery cost budget

Kilometres driven 8,000 10,000 12,000

Variable cost ($1.20 per km)

Fixed cost (vans and insurance) $9,000 $9,000 $9,000

Total delivery cost

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | PART B.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Schedule of collections

Collections January February March

30% of this month $30,000 $36,000 $45,000

50% of last month $45,000 $50,000 $60,000

18% of two months ago $14,400 $16,200 $18,000

Total $89,400 $102,200 $123,000

Question 2 - March cash budget

Item $

Opening cash 12,000

Collections 123,000

Payments (70,000 + 30,000 + 8,000 + 9,000 + 25,000) (142,000)

Depreciation Excluded - not a cash flow

Closing cash before financing (7,000)

Finance needed (to reach $10,000) 17,000

Question 3 - Flexible delivery cost budget

Kilometres 8,000 10,000 12,000

Variable ($1.20/km) $9,600 $12,000 $14,400

Fixed $9,000 $9,000 $9,000

Total $18,600 $21,000 $23,400

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.3 | WORKED ANSWERS

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