Question 2

1. Smith Ltd manufactures and sells one product. You are presented with the following information for the preparation of the annual operating budget for the period ending 31 December 2021:

• Estimated sales in units are 50,000 units for Quarter 1, 53,000 units for Quarter 2, 62,000 units for Quarter 3, and 65,000 units for Quarter 4. The estimated per unit selling price is $9 for Quarters 1-3, and $10 for Quarter 4.
• Smith Ltd has set the desired ending inventory of its product at 5% of the next quarters sales units. In quarter 4 of 2021 continuing into 2022, Smith Ltd aims to decrease this percentage to 2.5% of sales. It is expected that Smith Ltd will sell 60,000 units in Quarter 1 of 2022 and 65,000 units in Quarter 2 of 2022. The beginning inventory on 1 January 2021 is 3,000 units.
• Smith Ltd uses 2.5 kg of direct material per unit to produce its product. Smith Ltd has set the desired ending inventory of its direct material at 15% of the next quarters manufacturing needs. The beginning inventory on 1 January 2021 is 17,750 kg of direct material. Smith Ltd has secured a contract price with a supplier, in which the supplier will provide direct materials at a cost of $0.55 per kg over the next 18 months.

Tasks

Prepare the following budgets for the period ending 31 December 2021 (use whole numbers when rounding):

1. Sales budget.
2. Production budget.
3. Direct material purchases budget (use whole numbers when rounding).

2. You are presented with the following information relating to the preparation of Jones Ltd.s cash budget for the period ending 31 December 2021:

• Budgeted sales are as follows: $800,000 (Quarter 1), $920,000 (Quarter 2), $960,000 (Quarter 3) and, $1,000,000 (Quarter 4). The total sales for Quarter 4 of the previous period were $720,000. 60% of sales are for cash. Collections of credit sales from customers are 75% of credit sales in the quarter of sale and 23% of credit sales in the quarter following the sale. The remaining 2% of credit sales are considered uncollectable and are written off as bad debts at the end of the quarter after the credit sale occurred.
• Jones Ltd has a 30% investment interest in Jemma Ltd. It is expected that Jemma Ltd will declare dividends on 31 March 2021. Dividends declared are paid within 4 weeks after the end of the financial reporting period. Jemma Ltd has a 31 March end-of-financial reporting period. The total estimated dividend to be paid by Jemma Ltd is $450,000. Jones Ltd is entitled to 30% of this dividend.

• Budgeted material purchases are as follows: $140,000 (Quarter 1), $174,000 (Quarter 2), $200,000 (Quarter 3), and $210,000 (Quarter 4). The total material purchases in Quarter 4 of the previous period were $150,000. All material purchases are made on credit. 80% of purchases are paid in the quarter they are purchased in and 20% in the quarter following purchase.
• The following costs/expenses were budgeted for:

	Quarter
	1	2	3	4
Direct labour (hours)	10,000	11,500	12,500	13,000
Marketing expenses ($)	50,000	45,000	40,000	65,000
Administrative expenses ($)	200,000	220,000	220,000	230,000
Income tax payment ($)		300,000

• The cost of direct labour is $20 per hour.
• Manufacturing overhead is applied to products based on direct labour hours. The total budgeted manufacturing overhead cost is $1,175,000 which includes $45,000 per quarter depreciation expenses. Total budgeted labour hours is 47,000 hours.
• Marketing expenses include $5,000 depreciation per quarter and administration expenses include quarterly depreciation of $50,000.
• All expenses and labour costs are paid in the quarter incurred.
• Jones Ltd will pay dividends of $130,000 in Quarter 2.
• To innovate and grow, Jones Ltd is planning to build a new plant shortly. In anticipation of these changes, Jones Ltd purchased equipment at a cost of $130,000. The equipment will be paid for in full in Quarter 2.
• Jones Ltd has a cash balance of $350,000 at the start of Quarter 1 and would like to maintain a minimum end-of-quarter cash balance of $40,000.
• Short-term finance is available in multiples of $10,000 at an 8% per annum interest rate. Borrowings take place at the beginning of the quarter, while all repayments take place at the end of the quarter. Interest payments are made for the amount outstanding at the beginning of the quarter (including new borrowing for the quarter) Repayments are made in multiples of $10,000.

Task

Prepare a cash budget of Jones Ltd for the period ending 31 December 2021. Use whole numbers when rounding.