Cash Budgeting and Order Acceptance Decisions

This assignment focuses on cash budgeting for a company over three months (March, April, and May). It requires students to analyze the cash flow projections and determine the optimal course of action regarding two potential orders – Order A and Order B. The analysis involves calculating the profitability of accepting each order compared to normal production levels. Students must ultimately recommend which order, if either, the company should accept based on their calculations and provide a rationale for their decision.

Answer 1.
(a) The cash budget of the months March, April and May is as follows:
Cash budget
Particulars March April May
Opening cash balance 50000 750 7500
Receipts
Cash sales 20000 35000 45000
Received from debtors 82500 96250 103750
Cash available 152500 132000 156250
Payments
Purchase of motor van 50000 5000 5000
Payment to creditors 63000 75000 82000
Salaries 10500 12000 14000
Fixed overhead 27000 31500 37800
Salesman commission 1250 1000 1750
Total payments 151750 124500 140550
Closing balance 750 7500 15700
(b) Budgeting means forecasting the expenses and revenues and planning accordingly for
the month. It is important to create a plan so that there is no lack of cash at the time of
need (Shim, Siegel and Shim, 2013).
The importance of cash budgeting are-
(i) The company knows how much cash is available with it at present. It plans and
limits expenditures accordingly. This plan also helps to eliminate the wasteful
expenditures and helps the company in identifying the important areas of
expenditure.
(ii) Budgeting helps in creating plan for future growth. A company is able to develop
savings habit with the help of this planning procedure which further helps the
business to grow and expand. Therefore, there is also an increase in the size of the
capital of the company(Lalli, 2012).
(iii) Budgeting helps in creating a financial roadmap for the company. The company
reviews the past budgets prepared and studies the variances. The reason for this
variance is identifies and the preventive measure is taken in order to improve. If it
is observed that there is too much variance in the budget then it will depict the
inefficiency of the management and that the business situation is negative.
(iv) There are many companies that use accounting softwares but these softwares are
not very accurate in preparing budgets as there are lot of information that has to be
taken into consideration for preparing an efficient budget (Izhar and Hontoir,
2001).
Answer 2.

(a) Calculation of total profit if order A is accepted.
Normal production
Particulars
Sales
7500
0
Less: Variable cost
Direct material
2000
0
Direct labour
1000
0
Overhead 5000
Contribution
4000
0
Less: Fixed
Overhead 8000
Profit
3200
0
Order A
Particulars
Sales 12000
Less: Variable cost
Direct material 14000
Direct labour 7000
Overhead 3500
Profit from order A
-
12500
Total profit (A accepted)
Profit from normal production
3200
0
Loss from acceptance of order A
-
1250
0
Total profit (A accepted)
1950
0
(b) Calculation of total profit if order B is accepted.
Normal production
Particulars
Sales 7500

0
Less: Variable cost
Direct material
2000
0
Direct labour
1000
0
Overhead 5000
Contribution
4000
0
Less: Fixed
Overhead 8000
Profit
3200
0
Order B
Sales 18500
Less: Variable cost
Direct material 16000
Direct labour 8000
Overhead 4000
Processing cost 1600
Cost of Case 1600
Packing cost 960
Contribution (13660)
Total profit ( B accepted)
Profit from normal production 32000
Loss from acceptance of order
B
(13660
)
Total profit ( B accepted) 18340
© The company will have the maximum profits if it does not accept either of the offers. In
that case, the company will be able to earn 32000. However, if the company is bound to
accept any one of the orders then it should accept Order A because the total profit earned will
be 19500 whereas if it accepts order B, it will be able to earn a profit of 18340 only. The
profit earned through Order B is low because there is a presence of certain additional cost
such as processing cost and packing charges (Banks and Giliberti, 2008). As the selling price
per unit is also less than its normal selling price therefore the company cannot afford to
increase its cost in any manner.
Therefore, the company should accept order A in addition to the normal production of the
month.

References:
Banks, A. and Giliberti, J. (2008). Budgeting. Boston: McGraw-Hill.
Izhar, R. and Hontoir, J. (2001). Accounting, costing and management. Oxford: Oxford
University Press.
Lalli, W. (2012). Handbook of budgeting. Hoboken, N.J: Wiley.
Shim, A., Siegel, J. and Shim, J. (2013). Budgeting basics and beyond. Hoboken, N.J.: Wiley.