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    Holmes Company: Monthly cash budgets, expected collections

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    Holmes Company prepares monthly cash budgets. Relevant data from operating budgets for 2011 are:

    January February
    Sales $350,000 $400,000
    Direct materials purchases 110,000 130,000
    Direct labor 90,000 100,000
    Manufacturing overhead 70,000 75,000
    Selling and administrative expenses 79,000 86,000

    All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month
    following the sale, and 20% in the second month following the sale. 60% of direct materials purchases
    are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase.
    All other items above are paid in the month incurred except for selling and administrative expenses that
    include $1,000 of depreciation per month.

    Other data:
    1. Credit sales: November 2010, $260,000; December 2010, $320,000
    2. Purchases of direct materials: December 2010, $100,000
    3. Other receipts: January - Collection of December 31, 2010, notes receivable $15,000; February - Proceeds
    from sale of securitites $6,000
    4. Other disbursements: February - withdrawal of $5,000 cash for personal use of owner; Percy Smunch

    The company's cash blance of January 1, 2011, is expected to be $60,000. The company wants to maintain
    a minimum cash balance of $50,000

    a) prepare schedules for (1) expected collections from customers and (2) expected payments for direct
    materials purchases.
    b) prepare a cash budget for January and February in columnar form

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    Solution Summary

    The solution computes monthly cash budgets, expected collections & payments for Holmes Company.