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:

(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) Prepare a Cash Budget for the three months starting February 2020. (20 marks) (ii) Explain the purposes of preparing a budget. (5 marks) (ii) Prepare a Budgeted Income Statement for the month of March 2020. (10 marks) (iv) The actual results for the month of March 2020 are as follows:

(a) Using the actual data in the above table, prepare a variance analysis for the month of March 2020. (5 marks) (b) Discuss some probable causes of variance in the items. (5 marks)

January $ 71,000 February $ 82,500 March $ 89,000 April $ 99,800 Sales Purchases 34,000 39,800 48,000 53,400 Item Sales Purchase Overhead exp. Cleaning expenses Rent Wages Advertising $ 110,000 55,000 6,000 300 6,000 7,000 6,000