Luton Pod Cash Budget Exercise PDF

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Exercise for the first assessment ...

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Cash Budgeting – Revision You will be working on an accounting exercise soon after you return to your pod studies. This will involve cash budgeting (as well as the preparation of an income statement and statement of financial position). You may find it helpful to revisit the lectures on these topics and do some revision before the next pod session. As an aid to that revision, we have provided a practice exercise on cash budgeting (below). We shall publish an answer in due course, but we strongly suggest you attempt this exercise before returning to the pods. Some reminders:  A cash budget is usually prepared with time running from left to right  Operational budgets are common prepared on a weekly or monthly basis, but longer term strategic budgets may be on an annual basis  The principles are simple – list all the expected cash receipts and total them; list all the expected cash payments, and total these; find the difference between receipts and payment each period; prepare a running balance or overdraft/cash in hand each month  Remember to focus on expected actual receipts and actual payments – so if sales are made on credit, the receipts will be when the customers are expected to pay. Similarly, if purchases for resale are made on credit, the figures go in the period when the payment is made.  The main (but not the only) differences between the cash budget and the income statement are these:  Sales to customers and purchases for resale appear in the income statement when they are contracted, but the cash outcomes will often be later  Money invested in the business or money returned to investors or lenders will be in the cash budget but have nothing to do with profits  Money spent on new non-current (fixed) assets, or received for the sale of these will be in the cash budget, but it is depreciation that appears in the income statement  Best practice for spreadsheet design is to make sure that there are NO numbers embedded in the final statement. So all of the source data should be assembled in a table or tables away from the statement that will eventually be presented, and that output should be based entirely on references to the source data. This has two advantages: the spreadsheet is much easier to edit subsequently, and “what-if” modelling of different values for the source data is facilitated.

Luton Pod Manufacturing Cash Budget Exercise Luton Pod Manufacturing is considering the launch of a new product in July 2017. The basic data is as follows: 1. A new plant to produce the product will be rented from July 1st at a monthly cost of £32,000, payable in advance on the first of each month. 2. Fixed overheads for the plant of £58,000 will be payable each month, starting from July. 3. Equipment costing £500,000 will be installed early in July, but will be paid for in two instalments of £300,000 in September and £200,000 in December. 4. The variable cost of materials for the product will be £25 per unit. The supplier of materials will expect to be paid in the month following delivery. The first deliveries will be in July, allowing production to start in August, as stocks will be held, on average, for one month before being issued to production. 5. Production will take, on average, one month, so first sales will not be until September. 6. Customers are expected to take two months' credit. 7. Sales price is to be set at £40 per unit. 8. September sales volume is expected to increase by 2% compound in each month, at least until August 2018. The best estimate of September sales is 15,000 units, but the management would like to examine the effect upon the budget if sales are fewer than expected, or if the price has to be lowered to achieve the sales. Whatever sales are achieved in September, the remaining basic data above is expected to hold true. What is the maximum cash requirement during the year?

A possible template for your answer is attached; this is only a suggestion – other layouts are possible X

Luton Pod Manufacturing. Cash Budget for the year to June 30 2017 (all figures £) Jul

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Sales cash Materials cash Rent Overheads Equipment Total Payments Net flow Balance Base data Sales units September sales sales increase price unit variable cost overheads rent equipment 1 equipment 2

15,000 1.02 40 25 58,000 32,000 300,000 200,000...