Cash Payments
The direct material purchases budget (manufacturing) and purchases budget (retailing) provides the necessary framework to plan cash payments to vendors. Only a portion of the total cost of materials/ingredients/products purchased during a period will actually be paid during that same period. The company will have a normal payment schedule that takes full advantage of the credit period offered by vendors (30-45 days).
Other cash payments would be for direct labor and selling general and administrative. For labor costs, determine how much is normally owed to employees at the end of a period and subtract that from the total labor costs to calculate cash paid to employees. Manufacturing overhead and selling general and administrative expenses will subtract depreciation (non-cash expense reported on income statement as expense) to determine the amount of cash paid for overhead and SGA.
Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.
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