Krypton Ltd is preparing its budgets for the four months commencing 1 August 2020. The company makes and sells a single product.

The details of the product are thus:

Sales price $40 per unit

Direct material $8 per unit 5

Direct labour $10 per unit

Variable overhead $6 per unit

	BUDGETED PRODUCTION UNITS	BUDGETED SALES UNITS
JUNE	1400	1300
JULY	1500	1500
AUGUST	1800	1700
SEPT	2000	1900
OCT	2200	1800
NOV	2200	1800

The following information is also available:

i. Fixed overhead is budgeted at $9,000 per month, including depreciation of $3,000 payable

in the same month as it incurred

ii. Wages are paid 75% during the month in which they are earned, 25% in the month

following. The labour rate is expected to be increased by 1% each month from October

onwards.

iii. Variable overhead is paid in the month in which it is incurred

iv. Material costs are paid two months after the material is used in production

v. There is a tax liability of $14,000 to be settled in September

vi. The company will purchase a new van for $20,000 in July, payable in the following month.

The present van will be sold for $3,000 receivable in three equal consecutive installments

beginning from October.

vii. Five per cent of the monthly sales are for cash. The remainder will be sold on credit, the

debtors settling one month after the sales.

viii. Bad debts of 2% of debtors are anticipated

ix. Dividends of $2,000 are expected to be received in September

x. The cash balance on 1 August 2020 is expected to be $1,000 in hand

a) Prepare a cash budget for the four months commencing 1 August 2020 (12 marks)

b) Comment on the cash budget prepared in (a) and the implications for the company (3

marks)