EXERCISE 14.1 West Coast Cycles (Pty) Ltd (West Coast Cycles) has recently concluded a deal to purchase a bicycle manufacturing business for R381 250. This purchase price is payable on 1 June 2013 (the commencement date) and consists of: Goodwill Equipment Raw materials Finished goods - at cost (bicycles) R 150 000 R 165 000 R 26 250 R 40 000 A mini-van will be purchased for R150 000 cash as soon as operations commence. The mini-van will be used to make collections and deliveries for West Coast Cycles. The mini-van will have a useful life of 3 years for accounting purposes. The following sales forecasts have been made for the next six months: June R105 000 July R120 000 August R135 000 September R150 000 October R150 000 November R150 000 The above forecasts are stated before discounts. The company intends following a policy of 50% mark-up on cost. It is expected that 75% of sales will be on credit, while a 10% discount will be granted to all cash customers. 70% of all credit sales will be collected one month after the sale is made, and a further 28% will be collected the following month. The remaining sales will not be collected and the company will expense these as a bad debt at the end of the second month after the sales were made. Production costs will be R500.00 per bicycle, made up as follows: Raw materials Direct labour Fixed overheads R 250.00 150.00 100.00 500.00 Production will be planned such that the closing stock of finished goods at the end of every month is sufficient to meet the sales requirements for the following month. Raw materials will be purchased in sufficient quantities to meet half of the following month's production requirements. Raw materials will be purchased on two month's credit. Costs of direct labour will be paid on a monthly basis as it occurs. The fixed production overhead rate is based on a planned production of 2 400 bicycles per annum. This rate includes depreciation on equipment and the delivery vehicle to be purchased. Depreciation will be calculated at 20% per annum on the straight-line basis for equipment. All other fixed production overhead costs are cash items which are incurred evenly during the year and are paid in the month that they are incurred. The shareholders of West Coast Cycles have agreed to advance R750 000 in cash to the company at the beginning of June, to fund the acquisition. The current bank balance before this advance is R15 000. REQUIRED: (a) Prepare a monthly cash budget for West Coast Cycles (Pty) Ltd relating to the bicycle manufacturing business acquired. Your budget should include the business purchase and the first four months of operation. (b) Calculate the value of closing inventory at the end of the four month period. (c) Briefly describe the difference(s) between incremental budgeting and zero-based budgeting. Include a brief discussion on the benefits of each of these budgeting methods