Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 46

Prepare Cash Budget for Service Organization

The board of directors of the Cortez Beach Yacht Club (CBYC) is developing plans to acquire more equipment for lessons and rentals and to expand club facilities. The board plans to purchase about $50,000 of new equipment each year and wants to begin a fund to purchase a $600,000 piece of property for club expansion.

The club manager is concerned about the club’s capability to purchase equipment and expand its facilities. One club member has agreed to help prepare the following financial statements and help the manager ascertain whether the plans are realistic. Additional information follows the financial statements.

CORTEZ BEACH YACHT CLUB Statement of Income (Cash Basis) For the Year Ended October 31
	Year 9	Year 8
Cash revenues
Annual membership fees	$ 710,000	$600,000
Lesson and class fees	468,000	360,000
Miscellaneous	4,000	3,000
Total cash received	$1,182,000	$963,000
Cash costs
Manager’s salary and benefits	$ 72,000	$ 72,000
Regular employees’ wages and benefits	380,000	380,000
Lesson and class employees’ wages and benefits	390,000	300,000
Supplies	32,000	31,000
Utilities (heat and light)	44,000	30,000
Mortgage interest	70,200	75,600
Miscellaneous	4,000	3,000
Total cash costs	$ 992,200	$891,600
Cash income	$ 189,800	$ 71,400

Additional Information

1. Other financial information as of October 31, Year 9:

a. Cash in checking account, $14,000.

b. Petty cash, $600.

c. Outstanding mortgage balance, $720,000.

d. Accounts payable for supplies and utilities unpaid as of October 31, Year 9, and due in November Year 9, $5,000.

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2. The club purchased $50,000 worth of sailing equipment during the current fiscal year (ending October 31, Year 9). Cash of $20,000 was paid on delivery, with the balance due on October 1, which had not been paid as of October 31, Year 9.

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3. The club began operations in year 3 in rental quarters. In October Year 5, it purchased its current property (land and building) for $1,200,000, paying $240,000 down and agreeing to pay $60,000 plus 6 percent interest annually on the previously unpaid loan balance each November 1, starting November 1, Year 6.

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4. Membership rose 3 percent during year 9, approximately the same annual rate of increase the club has experienced since it opened and that is expected to continue in the future.

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5. Membership fees were increased by 15 percent in year 9. The board has tentative plans to increase them by 10 percent in year 10.

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6. Lesson and class fees have not been increased for three years. The number of classes and lessons has grown significantly each year; the percentage growth experienced in year 9 is expected to be repeated in year 10.

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7. Miscellaneous revenues are expected to grow in year 10 (over year 9) at the same percentage as experienced in year 9 (over year 8).

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8. Lesson and class employees’ wages and benefits will increase to $604,650. The wages and benefits of regular employees and the manager will increase 15 percent. Equipment depreciation and supplies, utilities, and miscellaneous expenses are expected to increase 25 percent.

Required

a. Construct a cash budget for year 10 for Cortez Beach Yacht Club.

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b. Identify any operating problem(s) that this budget discloses for CBYC. Explain your answer.

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c. Is the manager’s concern that the board’s goals are unrealistic justified? Explain your answer.

Step 1 of 3

The income statement is on a cash basis, hence we start with a budgeted income statement.

a.??

Cortez Beach Yacht Club Budgeted Statement of Income (Cash Basis) For the Year 10
Cash revenue
Annual membership fees?	$710,000 x 1.1 x 1.03	?	$804,430
?Lesson and class fees ?	(468,000 ÷ 360,000) x $468,000)	$608,400
?Miscellaneous ?	(4,000 ÷ 3,000) x $4,000)	5,333	613,733
??   Total cash received	?		$1,418,163
Cash costs
?Manager’s salary and benefits ($72,000 x 1.15) ?			$?82,800
?Regular employees’ wages and benefits ($380,000 x 1.15) ?			437,000
?Lesson and class employee wages and benefits (given)?			604,650
?Supplies ($32,000 x 1.25) ?			40,000
?Utilities (heat and light) ($44,000 x 1.25) ?			55,000
?Mortgage interest ($720,000 x .06)a?			43,200
?Miscellaneous ($4,000 x 1.25) ?			5,000
??Total cash expenses?			$1,267,650
Cash income?			$?150,513
Additional Cash Flows
Cash payments:
?Mortgage payment?			$?60,000
?Accounts payable balance at 10/31/Year 9?			5,000
?Accounts payable on equipment at 10/31/Year 9?			30,000
?Planned new equipment purchase?			50,000
??Total cash payments?			$ 145,000
Cash inflows from income statement?			150,513
Beginning cash balance (including petty cash)?			14,600
Cash available for working capital and to acquire property?			$?20,113

aOn November 1, Year 9, the unpaid balance after annual payment is $720,000, computed as follows: Balances after the $60,000 annual payment November 1, Year 6 = $900,000; November 1, Year 7 = $840,000; November 1, Year 8 = $780,000; November 1, Year 9 = $720,000 and as given in the problem.