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

Exercise 29

The George Company has a policy of maintaining an end-of-month cash balance of at least $30,000. In months where a shortfall is expected, the company can draw in $1,000 increments on a line of credit it has with a local bank, at an interest rate of 12 percent per annum. All borrowings are assumed for budgeting purposes to occur at the beginning of the month, while all loan repayments (in $1,000 increments of principal) are assumed to occur at the end of the month. Interest is paid at the end of each month. For April, an end-of-month cash balance (prior to any financing and interest expense) of $18,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $22,000 is anticipated. What is the interest payment estimated for April (there is no bank loan outstanding at the end of March)? What is the total financing effect (cash interest plus loan transaction) for May?

Step 1 of 4

Budgeting

Budget involves estimating the financial data for future period. Company prepares budget for its each of the accounts of financial data. This provides direction to the employees to achieve its target for coming period. Budget involves preparing master budget which includes sales budget, purchase budget, cash budget, payment budget, receipt budget, income statement budget, balance sheet budget and cash flow statement budget.