Problems

Question 1 (Prepare a cash budget) The following information was available from Montero Limiteds books: Month January February March April Purchases $42,000 48,000 36,000 54,000 Sales $72,000 66,000 60,000 78,000

Collections from customers are normally 70% in the month of sale, 20% in the month following the sale, and 9% in the second month following the sale. The balance is expected to be uncollectible. Sales for May are forecasted at $66,000. Montero Ltd takes full advantage of the 2% discount allowed on purchases paid for by the tenth of the following month. Purchases for May are budgeted at $60,000. Cash disbursements for expenses are expected to be $14,000 for the month of May. Montero Limited's cash balance at 1 May was $22,000. Required: Prepare the following schedules: (a) Expected cash collections during May. (b) Expected cash disbursements during May. (c) Expected cash balance at 31 May. Question 2 (Production budget) Bigsby Ltd has prepared the following sales schedule for the next six quarters: Q1 Units 2,000 Q2 5,000 Q3 4,000 Q4 1,000 Q5 2,500 Q6 6,000

Production policy requires production to meet the current quarter's sales plus 25% of the following quarter. The process requires one raw material input of which 2 kg are required to

produce one unit. The current cost of raw material is $3.00/kg but this is expected to increase by 5% at the beginning of the second quarter. Raw materials inventory policy requires purchases cover current needs and provide for 10% of the next month's production needs. At the beginning of the first quarter, both finished goods and raw materials inventory balances are expected to be at the required policy levels. Required: Prepare the production schedule (units only) and raw materials purchases schedule (units and dollar amounts) on a quarterly basis for the first four quarters. Question 3 (Comprehensive master budget for a manufacturing organisation) Laurena Limited sales were budgeted at 599,000 units for October; 600,000 units for November; and 610,000 units for December and January. The selling price is $28.00 per unit. All sales are on credit and are billed on the 15th and last day of each month with terms 2/10 net 30. Past experience indicates sales are made evenly throughout the month and 30 percent of the collections are received within the discount period. The remaining collections are received by the end of 30 days; bad debts average 1 percent of gross sales. Laurena Limited deducts the estimated amounts of cash discounts on sales and the losses from bad debts from sales on its income statement. The inventory of finished goods on 1 October was 90,000 units; the finished goods inventory at the end of each month is to be maintained at 25 percent of sales anticipated for the following month. There is no work in process inventory. FIFO inventory costing is used. Direct materials of half litre of A432 and one and one-half litres of B287 are required per finished unit. The inventory of direct materials on 1 October was 20,125 litres of A432 and 80,375 litres of B287. A432 costs $2.25 per litre while B287 costs $.80 per litre. At the end of each month, the direct materials inventory is to be maintained at 10 percent of production requirements for the following month. Direct material purchases for each month are paid in the next succeeding month on terms of net 30 days. Direct labour of one-half hour is required per unit; the direct labour rate is expected to average $8.00 per hour. All salaries and wages are paid in the month earned. A factory overhead application rate of 60 percent of direct labour dollars is used; depreciation of $60,000 per month is included in the rate. Marketing and administrative expenses total $5,000,000 per month, which include depreciation of $4,000 per month.

All manufacturing overhead and marketing and administration expenses are paid on the 10th of the month following the month in which they are incurred. A loan of $3,550,000 is due on 10 November. The cash balance on 1 November is expected to be $10,000. Required: Prepare the following for Laurena Limited: (a) (b) (c) (d) Direct materials purchases budget by month for October and November. Manufacturing cost budgets for October and November. Budgeted income statement for the month of November (ignore taxes and over/under applied overhead). A cash budget for the month of November.