A redundant manager who received compensation of 80 000 decides to commence business on 4 January, manufacturing a product for which he knows there is a ready market. He intends to employ some of his former workers who were also made redundant but they will not all commence on 4 January. Suitable premises have been found to rent and second-hand machinery costing 60 000 has been bought out of the 80 000. This machinery has an estimated life of five years from January and no residual value.

Other data

1. Production will begin on 4 January and 25% of the following month's sales will be manufactured in January. Each month thereafter the production will consist of 75% of the current month's sales and 25% of the following month's sales.

2. Estimated sales are

(units) ()

January Nil Nil

February 3200 80 000

March 3600 90 000

April 4000 100 000

May 4000 100 000

3. Variable production cost per unit

()

Direct materials 7

Direct wages 6

Variable overhead 2

-------

15

====

4. Raw material stocks costing 10 000 have been purchased (out of the manager's 80000) to enable production to commence and it is intended to buy, each month, 50% of the materials required for the following month's production requirements. The other 50% will be purchased in the month of production. Payment will be made 30 days after purchase.

5. Direct workers have agreed to have their wages paid into bank accounts on the seventh working day of each month in respect of the previous month's earnings.

6. Variable production overhead: 60% is to be paid in the month following the month it was incurred and 40% is to be paid one month later.

7. Fixed overheads are 4000 per month. One quarter of this is paid in the month incurred, one half in the following month, and the remainder represents depreciation on the second-hand machinery.

8. Amounts receivable: a 5% cash discount is allowed for payment in the current month and 20% of each month's sales qualify for this discount. 50% of each month's sales are received in the following month, 20% in the third month and 8% in the fourth month. The balance of 2% represents anticipated bad debts.

Required:

(a) (i) Produce a cash budget for each of the first four months, assuming that overdraft facilities will be available,

(ii) To state the amount receivable from customers in May;

(b) Briefly describe the benefits to cash budgeting from the use of a particular type of software package.