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.

 

Activity

Please complete the following activity.

 

 

ACT-On Frozen Delights budgeted direct materials (ingredients) purchases are $525,000 in Qtr. 1 and $675,000 in Qtr. 2. Payments are typically 40% in the quarter of purchase, and 60% in the following quarter. The budgeted cash payment for purchases in quarter 2 are:

 
 
 
 

 

The direct material purchases budget provides the necessary framework to plan cash payments for materials.