Cash Budget: A cash budget is an estimate of cash

receipts and cash payments prepared for each month. In

this budget all expected payments, revenue as well as
capital and all receipts, revenue and capital are taken into
consideration. The main purpose of cash budget is to
predict the receipts and payments in cash so that the firm
will be able to find out the cash balance at the end of the
budget period. This will help the firm to know whether
there will be surplus cash or deficit at the end of the
budget period. It will help them to plan for either
investing the surplus or raise necessary amount to
finance the deficit. Cash Budget is prepared in various
ways, but the most popular form of the same is by the
method of Receipt and Payment
method. This method is illustrated in the following
illustration.
Illustration VI: [Cash Budget]
ABC Co. wished to arrange overdraft facilities with its
bankers during the period April 2008 to June 2008
when it will be manufacturing mostly for the stock.
Prepare a Cash Budget for the above period from
the following data, indicating the extent of the bank
facilities the company will require at the end of each
month.

Particulars Sales Purchases Wages

February 2008 1, 80,000 1, 24,800 12, 000
March 1, 92,000 1, 44,000 14, 000
April 1, 08,000 2, 43,000 11, 000
May 1, 74,000 2, 46,000 10, 000
June 1, 26,000 2, 68,000 15, 000

Additional Information:
1. 50% of the credit sales are realized in the month
following the sales and remaining 50% in the second
month following. Creditors are paid in the month
following the month of purchases. There are no cash sales
or cash purchases
2. Cash at bank [overdraft] estimated on 1st April 2008 is
Rs.25, 000
Solution:
1. Working Notes:
Collection from debtors:
April: 50% of sales of February Rs.90, 000} 50% of sales
of March Rs.96, 000} Total Rs.1, 86,000

May50% of sales of March Rs.96, 000} 50% of sales of

April Rs.54, 000} Total Rs.1, 50,000

June 50% of sales of April Rs.54, 000 , 50% of sales of

May Rs.87, 000}} Total Rs.1, 41,000
Solution:
Cash Budget April – June 2008
Particulars April Rs. May Rs. June Rs.
A] Opening Balance
[Overdraft] 25, 000 56, 000 [47, 000]
B] Expected Receipts
Collections from debtors1, 86,000 1, 50,000 1, 41,000
C] Total Cash Available
[A + B] 2, 11,000 2, 06,000 94,000
D] Expected Payments
i. Payment to creditors 1,44,000 2,43,000 2,46,000
ii. Wages 11,000 10,000 15,000
E] Total Payments 1,55,000 2,53,000 2,61,000
F] Closing Balance
[C – E] 56,000 [47,000] [1, 67,000].

Flexible Budgets: A flexible budget is a budget that is

prepared for different levels of capacity
utilization. It can be called as a series of fixed budgets
prepared for different levels of activity. For
example, a budget can be prepared for capacity utilization
levels of 50%, 60%, 70%, 80%, 90% and
100%. The basic principle of flexible budget is that if a
budget is prepared for showing the results
at say, 15, 000 units and the actual production is only 12,
000 units, the comparison between the
expenditures, budgeted and actual will not be fair as the
budget was prepared for 15, 000 units.
Therefore a flexible budget is developed for a relevant
range of production from 12, 000 units to
15, 000 units. Thus even if the actual production is 12,
000 units, the results will be comparable
with the budgeted performance of 12, 000 units. Even if
the production slips to 8, 000 units, the
manager has a tool that can be used to determine budgeted
cost at 9, 000 units of output. The
flexible budget thus, provides a reliable basis for
comparisons because it is automatically geared
to changes in production activity. Thus a flexible budget
covers a range of activity, it is flexible
i.e. easy to change with variation in production levels and
it facilitates performance measurement
and evaluation.
While preparing flexible budget, it is necessary to study
the behavior of costs and divide them in
fixed, variable and semi variable. After doing this, the
costs can be estimated for a given level of
activity.
It is also necessary to plan the range of activity.
A firm may decide to develop flexible budget
for activity level starting from 50% to 100% with an
interval of 10% in between. It is necessary to
estimate the costs and associate them with the chosen
level of activity.
Finally the profit or loss at different levels of activity will
be computed by comparing the costs with the revenues.
A factory engaged in manufacturing plastic toys is
working at 40% capacity and produces 10, 000 toys per
month. The present cost break up for one toy is as under.
Material: Rs.10
Labor: Rs.3
Overheads: Rs.5 [60% fixed]
The selling price is Rs.20 per toy. If it is decided to work
the factory at 50% capacity, the selling price
falls by 3%. At 90% capacity, the selling price falls by
5% accompanied by a similar fall in the price of
material. You are required to prepare a statement showing
the profits/losses at 40%, 50% and 90% capacity
utilizations.
Solution:
Flexible Budget
At 40%, 50% and 90% Capacity Utilization
Particulars 40 50% 90% Capacity
Production - Units 10, 000 12, 500 22, 500
Selling Price P/ U Rs.20 Rs.19.40 Rs.19
Sales Value Rs.2, 00,000 Rs.2, 42, 500 Rs.4, 27, 500
Variable Costs:
Material
Rs.10 per unit Rs.1, 00,000 Rs.1, 21, 500 * Rs.2, 13, 750 **
Labor Rs.3
per unit Rs.30, 000 Rs.37, 500 Rs.67, 500
Overheads
Rs.2 per unit Rs.20, 000 Rs.25, 000 Rs.45, 000
Total Variable
Costs Rs.1, 50, 000 Rs.1, 84, 000 Rs.3, 26, 250
Fixed Costs Rs.30, 000 Rs.30, 000 Rs.30, 000

Total Costs
[Variable Cost
+ Fixed Cost]
Rs.1, 80, 000 Rs.2, 14, 000 Rs.3, 56, 250
Profi t/Loss
[Sales –
Total Costs] Rs.20, 000 Rs.27, 500 Rs.71, 250
* 12, 500 units X Rs.9.70 per unit = Rs.1, 21, 500
** 22, 500 units X Rs.9.50 per unit = Rs.2, 13, 750