ABC Records Ltd owns a chain of 14 shops selling compact discs and is looking to

undertake some refurbishment work in its main shop to improve sales. At the beginning

of June, the business had a cash balance of $35,000.

The following plans were prepared for the business some months earlier:

May June July August

$000 $000 $000 $000

Sales revenue 180 230 320 250

Administration expenses 52 55 56 53

Selling expenses 22 24 28 26

Finance payments 5 5 5 5

Further information:

ABC Records Ltd. sells compact discs at $10 per unit. The standard variable cost

is $8 per unit.

The inventories level at 1 June was $112,000. To have sufficient levels of

inventories to meet each month's sales, the business will require purchases of 75%

of the previous month's sales. The gross profit margin is 40%.

Suppliers allow one month's credit for all purchases made by the business and the

business is known to be prompt in their payments. Total purchases in May was

$120,000.

The business expects to receive 60% of all sales in the month of sale and the

remaining 40% is collected in the following month.

The business has a bank loan, which it is paying off in monthly instalments of

$5,000. The interest element represents 20% of each instalment.

Administration expenses are paid when incurred and includes a charge of $15,000

each month in respect of depreciation.

Selling expenses are payable in the following month.

Shop refurbishment costs amounting to $22,000 is incurred in June and paid in two

equal instalments in July and August, respectively.

Required:

a) Prepare the inventories budget for the three months to 31 August which shows the inventories position at the end of each month.

b) Prepare a cash budget for the month of 31 July which shows the cash balance at the end of the month.

c) Prepare a budgeted income statement for the total of the three months from 1 June to 31 August.

d) Suppose it is now 1 September, and ABC Records Ltd. sold 30,000 compact discs in August at the selling price of $10 per unit. Calculate and interpret the sales variance for the month of August.