Herbert Limited make a single product, whose unit budget details are as follows:

2 Credit sales will account for 60 per cent of total sales. Debtors are expected to pay in the month following sale for which there will be a cash discount of 2 per cent.
3 Stock levels will be arranged so that the production in one month will meet the next month's sales demand.
4 The purchases of direct materials in one month will just meet the next month's production requirements.
5 Suppliers of direct materials will be paid in the month following purchase.
6 Labour costs will be paid in the month in which they are incurred. All other expenses will be paid in the month following that in which they are incurred.

7 Fixed expenses are \(£ 2,000\) per month and include \(£ 180\) for depreciation.
8 The bank balance at 1 July 19 X 9 is \(£ 3,900\) favourable to the business.

Required

(a) A cash budget for Herbert Limited for the three month period ending on 30 September \(19 \mathrm{X} 9\) showing the balance of cash at the end of each month.

(b) List and explain three ways in which the preparation of a cash flow budget could be of advantage to the management of Herbert Limited.

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Selling price Less Costs Direct material Direct labour Direct production expenses Variable selling expenses Contribution 30 9464 37 23 July August 800 400 September 600 October 900 Additional information 1 Unit sales are expected to be: June 1,000