Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 35

Cash Disbursements Budget The Ajax Company budgets the following purchases of direct materials for the first quarter of the year:

	January	February	March
Budgeted purchases	$100,000	$120,000	$110,000

All purchases of direct materials are made on credit. On average, the company pays 75 percent of its purchases in the month of sales, and the remainder in the following month.

Required

1. For the months of February and March, what are the estimated cash payments for purchases of direct materials under the assumption that there is no (cash) discount for early payment?

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2. For the months of February and March, what are the estimated cash payments for purchases of direct material under the assumption that the purchase terms are 2/10, net 30? The company’s policy is to take advantage of all cash discounts for early payment.

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3. Provide an economic argument as to why it is good (economic) policy to take advantage of early payment discounts, as in (2) above.

Step 1 of 6

Cash disbursement is the cash payment made by the individual or the company is a specified period of time which could be week, month, year etc. These payments are made against the purchases made by firm or the operating expense which occur.