You have taken up at 1 November 19X7 an appointment as the managing accountant with a company manufacturing mainly for export. You arrive to find there is a cash crisis. The company had promised to repay a 1 October bank overdraft of $50000 by the year end. This had been agreed on the basis of expected profits of $164000 for the last quarter, as shown in section A below. The overdraft, however, had actually increased substantially at the end of October.

REQUIRED Using the additional data provided in section B:

(a) prepare a cash budget separately for October, November and December 19X7

(b) explain briefly why the bank overdraft increased in October

(c) calculate whether or not the overdraft can be cleared by the year end SECTION A PRODUCT COST SHEET Up to 22000 units per month Direct materials Direct wages Direct expenses Over 22000 units per month Direct wages and expenses increase by 50%

on incremental quantities Sales 1 OX7-8:

Actual 000 units Jul 20 Nov Aug 20 Dec Sept 20 Jan Oct 30 Feb Profit forecast 4th quarter 19X7:

$

Sales revenue 86000 @ 15.00 Direct cost 66000 @ 11.00 20000 @ 12.50 Contribution Overhead cost:

Production General administration Marketing

$

per unit 8

2 1

11 Forecast 000 units 30 26 30 34

$000 $000 1290 726 250 976 314 90 24 36 150 164 Work-in-progress takes one month to complete, direct materials are received at the commencement of each month, and the labour is spread evenly throughout the period Finished goods are held in warehouse for 1 month for export packaging and delivered the following month Customers' payments are received 10 per cent at the end of the month following despatch, 80 per cent at the end of the next subsequent, and the balance 1 further month later Direct materials are paid for at the end of the month following their receipt Direct and indirect expenses payments are made during the month they are incurred, except as indicated below Production overhead includes:
(i) 60000 per year for rent which is paid twice a year in advance on 15 May and 15 November (ii) 120000 per year for depreciation Both of these are spread in equal monthly segments Marketing overhead includes $36000 peryearfor sales commission. which is charged out monthly, but paid in arrears on 20 December Direct wages are paid weekly in arrear, and it can be assumed that at each month end one-quarter of that month's cost is unpaid There have been no changes in selling prices since July 19X7 Taxation should be ignored ICMA, PS, Part Ill, Management Accounting 2, November 1977.