Houghton Ltd is planning to set up a business on 01/07/2020 and has made the following forecast for the first six months of trading: Sales prices per unit is €50 - Leaving Cert Accounting - Question 9 - 2020

The raw material requirement can be calculated as follows:

• Units Required for Production:

  • July: 18,360 units * 4 kg = 73,440 kg
  • August: 11,780 units * 4 kg = 47,120 kg
  • September: 12,080 units * 4 kg = 48,320 kg
  • October: 12,320 units * 4 kg = 49,280 kg

• Stock of Raw Materials Held at End of Month:

  • July: 20% of August's requirement = 9,424 kg
  • August: 20% of September's requirement = 9,664 kg
  • September: 20% of October's requirement = 9,856 kg
  • October: 20% of (assumed November's requirement) = 9,856 kg

• Opening Stock:

  • July: 0 kg assumed
  • August: 9,424 kg (closing of July)
  • September: 9,664 kg (closing of August)
  • October: 9,856 kg (closing of September)

Using the formula:

Required Purchases = Units Required for Production + Closing Stock - Opening Stock

• July: 73,440 + 9,424 - 0 = 82,864 kg

• August: 47,120 + 9,664 - 9,424 = 47,360 kg

• September: 48,320 + 9,856 - 9,664 = 48,512 kg

• October: 49,280 + 9,856 - 9,856 = 49,280 kg

• Cost of Raw Materials:

  • Price per kg = €3
  • Thus:
  • July: 82,864 kg * €3 = €248,592
  • August: 47,360 kg * €3 = €142,080
  • September: 48,512 kg * €3 = €145,536
  • October: 49,280 kg * €3 = €147,840

Final purchases budget in units and €:

• July: 82,864 kg (€248,592)
• August: 47,360 kg (€142,080)
• September: 48,512 kg (€145,536)
• October: 49,280 kg (€147,840)

First, we need to calculate cash inflows and outflows for each month:

Cash Inflows:

• Cash Sales (40% of Sales Revenue):

  • July: €11,400 * €50 * 0.40 = €228,000
  • August: €11,600 * €50 * 0.40 = €232,000
  • September: €11,900 * €50 * 0.40 = €238,000
  • October: €12,200 * €50 * 0.40 = €244,000

• Credit Sales (60% of Sales Revenue) from Previous Month:

  • July: €0 (no previous month)
  • August: €11,400 * €50 * 0.60 = €342,000
  • September: €11,600 * €50 * 0.60 = €348,000
  • October: €11,900 * €50 * 0.60 = €357,000

Total Cash Inflows:

• July: €228,000 + €0 = €228,000
• August: €232,000 + €342,000 = €574,000
• September: €238,000 + €348,000 = €586,000
• October: €244,000 + €357,000 = €601,000

Cash Outflows:

• Payments (Wages, Overheads, Purchases, etc.): Calculate using specifics noted in the problem. (Sum the relevant costs including €20,000 wages, €12 per unit variable costs, and fixed overheads)

Cash Budget Summary:

• Calculate Net Cash Flow (inflows - outflows)

• Opening Cash Balance: Assume it starts at €0 or as provided; calculate the closing cash balance for each month.

This will ultimately show how much cash Houghton Ltd will have at the end of October 2020.

The cash budget offers several critical insights for Houghton Ltd:

1. Cash Flow Management: It helps in understanding the timing of cash inflows and outflows, thereby ensuring the company can meet its financial obligations as they arise.

2. Surplus or Deficit: The budget indicates whether the company expects to have surplus cash or face a deficit, allowing for timely financial planning.

3. Planning for Borrowing or Investments: If a cash deficit is anticipated, the company can plan for financing or adjustments to its operations in advance, potentially reducing the need for emergency loans.

4. Adjustment of Operations: Insights from cash flow can inform decisions regarding purchasing, production, and staffing, aligning them more closely with cash availability.

5. Budget Variance Analysis: It provides a baseline against which actual performance can be measured, allowing for better control and corrective action if necessary.

A master budget is a comprehensive financial planning document that consolidates all of a company’s individual budgets for a given period. It serves several purposes:

1. Overall Financial Planning: It outlines the overall financial goals and strategies, integrating all aspects of the business, including sales, production, operating expenses, capital expenditures, and cash flows.

2. Coordination of Activities: It facilitates communication and coordination among various departments, ensuring that all units of the organization work towards the same financial objectives.

3. Performance Evaluation: The master budget acts as a benchmark for evaluating actual performance, thus helping in identifying variances, implementing corrective measures, and enhancing managerial decisions.

4. Resource Allocation: It guides the allocation of resources in order to optimize the financial performance of the company and ensure operational efficiency.

In summary, a master budget is essential for providing direction, establishing performance standards, and fostering accountability within an organization.