Worked example 1

A retailer expects to sell 10,000 units next quarter. Opening inventory is 1,200 units; desired closing inventory is 1,800 units. Calculate the budgeted production.

Show solution outline

Production = Sales + Closing inventory − Opening inventory

= 10,000 + 1,800 − 1,200 = 10,600 units

The firm must produce 600 more units than it sells to build up its stock for the following period.

Worked example 2

Crafty Creations is preparing its cash budget for the first quarter. The opening cash balance on Jan 1st is $5,000. Budgeted cash flows are:

Cash Sales: Jan $10,000; Feb $12,000; Mar $15,000.
Credit Sales (collected one month later): Dec $4,000; Jan $5,000; Feb $6,000.
Cash Payments (Materials & Wages): Jan $8,000; Feb $9,000; Mar $11,000.
Rent (paid in Jan): $3,000 for the quarter. Calculate the closing cash balance for March.

Show solution outline

Step 1: Calculate total cash inflows for each month.

Jan Inflows = $10,000 (cash sales) + $4,000 (Dec credit sales) = $14,000
Feb Inflows = $12,000 (cash sales) + $5,000 (Jan credit sales) = $17,000
Mar Inflows = $15,000 (cash sales) + $6,000 (Feb credit sales) = $21,000

Step 2: Calculate total cash outflows for each month.

Jan Outflows = $8,000 (payments) + $3,000 (rent) = $11,000
Feb Outflows = $9,000 (payments) = $9,000
Mar Outflows = $11,000 (payments) = $11,000

Step 3: Calculate monthly net cash flow and closing balance.

January:
- Net Cash Flow = $14,000 - $11,000 = $3,000
- Closing Balance = $5,000 (opening) + $3,000 = $8,000
February:
- Net Cash Flow = $17,000 - $9,000 = $8,000
- Closing Balance = $8,000 (opening) + $8,000 = $16,000
March:
- Net Cash Flow = $21,000 - $11,000 = $10,000
- Closing Balance = $16,000 (opening) + $10,000 = $26,000

The closing cash balance for March is $26,000.

The meaning and purpose of budgets — practice questions

Worked example 1

Worked example 2