Prepare a schedule of expected cash disbursements during

Question

PROBLEM Behavioural Aspects of Budgeting

Five years ago. Phil Davis left his position at a large company to start Collyer Integrated Solutions Co. (CISC), a software design company. CISC's first product was a unique software package that seamlessly integrates networked PCs. Robust sales of this initial product permitted the company to begin development of other software products and to hire additional personnel. The staff at CISC quickly grew from three people working out of Davis's basement to more than 70 individuals work­ing in leased spaces at an industrial park. Continued growth led Davis to hire seasoned marketing, distribution, and production managers and an experienced accountant.

Recently, Davis decided that the company had become too large to run on an informal basis and that a formalized planning and control program centred around a budget was necessary. Davis asked the accountant, Jan Smith, to work with him in developing the initial budget for CISC.

Davis forecasted sales revenues based on his projections for both the market growth for the initial software and successful completion of new products. Smith used this data to construct the master budget for the company, which she then broke down into departmental budgets. Davis and Smith met a number of times over a three-week period to hammer out the details of the budgets.

When Davis and Smith were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining CISC's new budgeting system. The letter requested everyone's assistance in working together to achieve the budget objectives.

Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projec­tions were overly optimistic and not realistically attainable.

Required:

1. How does the budgeting process Davis and Smith used at CISC differ from recommended practice?

2. What are the behavioural implications of the way Davis and Smith went about preparing the master budget?

PROBLEM Schedules of Expected Cash Collections and Disbursements

Calgon Products, a distributor of organic beverages, needs a cash budget for September. The fol­lowing information is available:

a. The cash balance at the beginning of September is $9,000.

b. Actual sales for July and August and expected sales for September are as shown below. Sales on account are collected over a three-month period as follows: 10% collected in the month of sale, 70% collected in the month following sale, and 18% collected in the second month fol­lowing sale. The remaining 2% is uncollectable.

	July	August	September
Cash sales.......................	S 6,500	S 5,250	S 7,400
Sales on account..............	20,000	30,000	40,000
Total sales........................	$26,500	$35,250	$47,400
			1111=11i

c. Purchases of inventory will total $25,000 for September. Twenty percent of a month's inven­tory purchases are paid for during the month of purchase. The accounts payable remaining from August's inventory purchases total $16,000, all of which will be paid in September.

d. Selling and administrative expenses are budgeted at $13.000 for September. Of this amount, $4,000 is for depreciation.

e. Equipment costing $18,000 will be purchased for cash during September, and dividends total­ling $3,000 will be paid during the month.

f. The company maintains a minimum cash balance of $5,000. An open line of credit is available from the company's bank to bolster the cash position as needed.

Required:

1. Prepare a schedule of expected cash collections for September.

2. Prepare a schedule of expected cash disbursements during September for inventory purchases.

3. Prepare a cash budget for September. Indicate in the financing section any borrowing that will be needed during September.