Managerial Accounting

Business

Quiz 8 :
Master Budgeting

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Quiz 8 :
Master Budgeting

1)The first step to creating a schedule of expected cash collections is determining how sales each month affect sales in subsequent months. The third quarter of the year includes July, August and September. Since we know that 20% of sales are collected in the same month of sale, 70% of sales are recovered in the month following a sale and 10% is recovered two months following a sale, we can determine the amount of expected cash receipts for each month by back dating. For example, to first determine expected cash collection for July, we simply need to follow the collection schedule. Work backwards. 1. Two months before July is May (for August, it is June; for September, it is July). Therefore, we will need to collect 10% of the sales made in May during July (as well as 10% of June sales in August and 10% of July sales in September). 2. One month before July is June (For August, it is July; for September, it is August). Therefore, we will need to collect 70% of the sales made in June for July (as well as 70% of July sales in August and 70% of August sales in September). 3. Finally, we also know that 20% of July sales will be collected in July (20% of August sales will also be collected in August and the same for September). 4. Sum the results of collections for each month This is best represented in a schedule: img 2)Follow the collection schedule. Keep in mind that to find the accounts receivable as of September 30, you are really using the cost schedule for the months of October and November (September sales won't be fully collected until two months after the sale which includes 10% in November), as that is what you will have to collect for in the next period: 1. Two months before October is August. Therefore, we will need to collect 10% of the sales made in August during October. 2. One month before October is September. Therefore, we will need to collect 70% of the sales made in September for October. 3. Finally, we also know that 10% of September sales will be collected in November, and therefore remain uncollected as of September 30. 4. Sum the results of collections for the month. Accounts receivable at September 30: img

A Budget is a quantitative expression of a plan of action prepared in advance of the period to which it relates. It may be prepared for the entire organisation or for various departments or for various functions involved in the organisation. Budget is a means of translating the overall objectives of the business into detailed feasible plan of action. A Budget is a pre-determined statement of management policy during a given period which provides a standard comparison with the results actually achieved. The budget is an estimate prepared in advance of the period to which it applies. Budgetary control is a system of controlling costs through budgets budgeting is thus only a part of the budgetary control. Budgetary control is the establishment of budgets relating to the responsibilities of executives of a policy and the continuous comparison of the actual with the budgeted results, either to secure by individual action the objectives of the policy or to provide a basis for its revision.

Production budget: To meet the desired level of inventory and budgeted sales for the year, the budget, which estimates the number of units to be manufactured, is called production budget. The budget should be prepared based on the estimated sales of the year to ensure that production and sales are kept balanced during the year. The first step in creation of a production budget is to determine the ending inventory for each month. In the given case, it is three months. Accordingly, there is a need to determine the amounts for the month of July, August and September (October falls in the fourth quarter of the year and not the third). Since estimated ending inventory is equal to 10% of the next month's sales, the calculation is as follows: Ending inventories: img It is also important to note that the ending inventory for one month is equal to the beginning inventory of the next month. Accordingly, the beginning inventory for July is 3,000, 4,500 for August, and 6,000 for September. The production budget: img