John intends to start up a business in vehicle spare parts by incorporating a company. He has a savings of $5,000 at bank. He plans to approach his bank for any necessary additional finance. He provides the following budgetary information.

(a) He will purchase a car for $15,500 in the beginning of March 2020. All vehicles are expected to have a five-year useful life.

(b) The budgeted sales and purchases of spare parts for the following four months will be as follows:

Sales January - $71,000 February - $82,500 March - $89,000 April - $99,800

Purchases January - $34,000 February - $39,800 March - 48,000 April - $53,400

(c) 50% of sales are expected to be paid for by cash. The remaining 50% sales are expected to be paid equally in the following two months.

(d) 30% of the purchases are expected to be paid for in the month of purchase. 40% of the purchases are expected to be paid in the month after purchase. The remainder will be paid for two months after purchase.

(e) Variable overheads are budgeted at $6,500 monthly, from January, and are expected to increase by 5% each month. Such overheads are expected to be paid in full in the month in which they occur.

(f) Depreciation on existing personal assets is expected to be $100 each month and cleaning expenses are expected to be $250 per month.

(g) In March 2020 John will acquire a delivery lorry for $19,000 and will pay 40% of the cost in same month. The remainder will be paid in equal instalments over the following ten months together with simple interest at 10% p.a. Interest shall be charged as from month of acquisition.

(h) John will make drawings of $6,000 each month, together with an additional $3,000 in March 2020.

(i) John will rent another showroom starting February 2020 at $6,000 per month.

(j) He expects to pay $6,500 as wages every month.

(k) He expects to pay for advertising for a total of $5,500 in March and $6,500 in April 2020.

(l) The opening bank balance in January is expected to be $25,900.

You are required to:

(i) Build a Cash Budget for the three months starting February 2020.

(ii) Explain the purposes of preparing a budget.

(ii) Build a Budgeted Income Statement for the month of March 2020.

(iv) The actual results for the month of March 2020 are as follows:

Item

Sales - $110,000

Purchase - $55,000

Overhead exp. - $6,000

Cleaning expenses - $300

Rent - $6,000

Wages - $7,000

Advertising - $6,000

(a) Using the actual data in the above table, prepare a variance analysis for the month of March 2020.

(b) Discuss some probable causes of variance in the items.

(v) Explain how standard costing is helpful to management.