The functional budget is one that relates to any of the functions of an organization. The number of functional budgets depends upon the size and nature of business. The following are the commonly used:
A budget center is a section of the organization of the undertaking defined for the purpose of budget control. Budget centers should be established for cost control and all the budgets should be related to cost centers. Budget centers will disclose the sections of the organization where planned performance is not achieved. The budget center must be separately delimited because a separate budget has to be set with the help of the head of the department concerned. To illustrate, the production manager has to be consulted for the preparation of the production budget and finance manager for the cash budget.
Cash budget is the budget which present expected cash inflow and outflow of the entity for the designated time period. Cash budget is prepared for purpose of cash planning and control. The cash budget helps management keep cash balance in reasonable relationship to its needs. It aid in avoiding unnecessary idle cash and possible cash shortages.
Tanzania Glass Company is preparing its cash budget for the first quarter of 2015. The use of the company’s main manufacturing equipment is characterize by frequent stoppages to let it cool down to operating temperatures, a reminder that the equipment is due for replacement. The resulting slow pace of production has led to the incurrence of unplanned overtime costs and other overheads.
The following information has been collected to facilitate the budgeting exercise.
Sales (actual or estimated) over the last quarter of 2014 and the first quarter of 2015 are shown below:
October 2014 Tshs 150,000 (actual)
November 2014 Tshs 145,000 (actual)
December 2014 Tshs 145,000 (estimated)
January 2015 Tshs 130,000 (estimated)
February 2015 Tshs 175,000 (estimated)
March 2015 Tshs 250,000 (estimated)
The company plans to buy and install a new machine in January 2015. This will cost Tshs 604,500, all of which will be paid in January.
Wages, which are paid in the month in which they are incurred, are expected to fall from the Tshs 40,000 December 2014 level to Tshs 20,000 in subsequent month
Purchases of the material in each month amount to 30 % of that month’s planning sales value. Suppliers for material allow I month’s credit and the company fully avails credit facility
Fixed overhead have been at Tshs 70,00 (including Tshsh 20,000 for depreciation). Except for the monthly depreciation charge which is expected to increase by Tshs 5,000 in January, following the installation of the new machine, this is the level anticipated for the foreseeable future.
50% of the sales of each month result in cash being collected in the month of sale, 30% of the sales lead to cash being collected in the month following the month of sale, and the remaining balance is collected in the second month after the month of sale. There are no bad debts and discounts allowed.
The cash balance as at 30 November 2014 is Tshs 5,000.
- Prepare a cash budget for the first quarter of year 2015
- If the company plans to meet any cash deficit by obtaining an overdraft and it is expected that the March 2015 level of activity is going to be maintained for the foreseeable future, in what month will the company be able to complete repayment of the overdraft?