Question 2 (20 marks) LH Limited produces only 1 product. The company accountant is now preparing the cash budget for the 2nd quarter of 2021 with the following information.

(i) The company are with the following balance as at 31 March 2021: $ Cash 265,040 Account receivables 440,000 Direct materials inventory (600kg) 15,000 Machinery, net book value 108,000 Accounts Payable 200,000

(ii) Actual and estimated sales level: March 2021 April 2021 May 2021 June 2021 (Actual) (Estimated) (Estimated) (Estimated) $400,000 $576,000 $748,800 $842,400 80% of the sales are on credit basis. 70% of the credit sales would be settled in the following month after sales and the remaining balance one month later. The selling price is maintained at $400 per unit. For budgeting purposes, it is assumed that no inventory will be kept for finished goods and work-in-progress at the end of each month.

(iii) Each unit of the product requires 8 kg of direct material at $25 per kg, and 30 minutes of direct labor at $80 per hour. There is expected a 10% abnormal loss of material input and no effect on other production costs.

(iv) The total monthly production overheads are fixed. The normal production capacity is 2,200 units per month in 2021. Per unit production overheads is expected to be $28. Monthly depreciation for machinery is $5,600. Production overheads are to be paid in the month incurred.

(v) Monthly non-production expenses: Salaries for administrative staff $100,000 Office rent $50,000 Sales commission 10% of sales Other operating expenses $5,000 The expenses are to be paid in the month incurred.

(vi) Sales training courses costing $50,000 will be held by a training company for some staff in May 2021. A down payment of 60% of the training fee is to be paid in April and the remaining balance will be settled upon completion of the training. The administrative staff will take up part of the sales work and the sales commission will be decreased to 5% of the sales starting from June 2021. Page 10 of 10

(vii) LH Limited sets a minimum cash balance requirement of $70,000 at the end of each month. In case of any shortfall of the minimum, the company had an arrangement with a bank to borrow the necessary amount at the end of the month. The bank will charge an interest of 12% per annum through a direct debit of the companys bank account at the end of the following month. Repayment to the bank would be made at the end of the month when the month-end cash balance requirement is met. Based on the above information, answer the following questions:

(a) Prepare a statement showing the calculation of direct material purchases, in columnar form for months of April, May and June 2021. (6 marks)

(b) Prepare for LH Limited the cash budget (in columnar form for each month) for the three months ending 30 June 2021. (8 marks)

(c) Discuss the importance of preparing a cash budget for a company. (6 marks)