Peninsula Crafts Limited is attempting to forecast its cash requirements for the third quarter of 2021.

Budgeted sales units for the next five months of 2021 are:

	July	August	September	October	November
Sales Units	16,000	14,000	16,000	15,000	6,000

 

The sales price has been set at €25 per unit.  Proceeds are collected 50% in the month of sale and 50% in the following month.  In respect of sales prior to 30 June, €60,000 will be collected in July.

 

1. The company’s policy is to hold inventory of finished goods at the end of each month equal to 80% of estimated sales for the following month.  The inventory at 30 June complies with this policy.

2. Each unit manufactured requires 2 kilograms of raw material.  This is expected to cost €4.50 per kilogram.  Raw material is held in quantities equal to amounts required for production in the following month. One month’s credit is normally allowed in respect of purchases. The June invoice for raw materials was for €101,500.
3. Labour requirements are 0.5 hours per unit of production.  There is a basic labour force of 50 people, each employed for 150 hours a month at a cost of €2,800, regardless of the level of operations.  Overtime, at a rate of €30 an hour is paid when additional capacity is required.
4. Variable overheads of €2 per unit of production will be incurred.  Like labour costs, these are payable in the month of production.  Fixed overheads are expected to be €360,000 for the year.  Apart from depreciation and other non-cash expenses amounting to €120,000, these are expected to be incurred evenly throughout the year.

5. In order to increase sales in the normally quiet winter months, the company has planned an advertising campaign which is due to start in August. A well-known influencer will promote the product on her social media at a cost of €10,000. Half of this payment is to be made at the beginning of August, with the balance due in October.
6. A new machine, costing €90,000 is to be ordered in July and is expected to arrive in September. A 50% deposit must be paid when it is ordered with the balance due on delivery.
7. The bank balance will be €65,000 on 1 July. The business does not have an agreed overdraft facility with its bank.

Requirement:

1. Prepare the following budgets for July, August and September, showing all your workings:
   1. Sales receipts budget
   2. Production Budget
   3. Raw materials usage budget
   4. Purchases payments budget
   5. Labour payments budget
   6. Cash Budget

2. Identify one element of Peninsula Crafts’ “discretionary budget” and explain in your own words what is meant by discretionary budget.

3. It is often said that “cash is king” for businesses. Based on the figures from the cash budget, explain how the budgeting process is helpful for Peninsula Crafts and make two suggestions for changes to Peninsula Crafts budgets, explaining how your suggestions would improve the cash position for the company.