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Hello Mr John Moffat , I have a question regarding timing of cash flows for a cash budget.
Dec Jan Feb Mar Apr
Sales (Units) 1200 1250 1300 1400 1500Notes:
1 Sales are on one month credit ($800 per u, and 5% increase in Feb)
Jan Feb Mar
answer 1200*800=960 1250*800=1000 1300*800*1.05=10922. Production is one month before sales. Each unit produced requires 2 units raw mat. at $200 per unit. Raw materials purchases are on one month credit.
Jan Feb Mar
1250*2*200 = 500 1300*2*200 = 520 1400*2*200= 560
*****why does it start from Jan 1250 u? Because sales from Jan are going to be received in Feb, so one month prior (prod. is one month prior to sales) is Jan? One month prior to when cash from sales is collected?3. VC are incurred and paid in the month of production. VC = $100 Per unit.
Jan Feb Mar
1300units*100=$130 1400*100=140 1500*100=150****why does it start with units from Feb (1300u) when acc. above calculation production for Jan is in Jan(one month before sales) so for Jan should be 1250*100 = $125
Is it a mistake in the Rev Kit?
With regard to (2), purchases are on one months credit. So the payment in January will be for Decembers production.
Production takes place one month before sales, so Decembers production will be for January’s sales.
Therefore the payment in January will be for the production of what was sold in January.With regard to (3), the variable costs are paid in the month of production. Therefore the payment in January will be for what was produced in January. Since production takes place one month before sales, the production in January (and therefore the payment for variable costs) will be for whatever is sold in February i.e. for 1,300 units.
The answer in the BPP Revision Kit is correct (and is the same as the examiners own answer to the question).
Have you watched by free lectures on cash budgets? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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