Question 4

a) Given the following information taken from the budgets of Winchester Ltd completed during the budget process prepare a cash budget for Winchester Ltd for the 3 months April to June.

March April May June

Sales 5,300 5,500 5,600 5,700

Purchases 1,400 1,450 1,500 1,600

Overheads 1,950 1,800 1,960 2,050

Other information

• Winchester Ltd sells 25% of its goods for cash. The remainder of customers take one months credit
• Purchases are paid the month after they are incurred
• Wages are paid one month in arrears and are calculated on a commission basis of 20% of the monthly sales revenue.
• Overheads are paid the month after they are incurred and the numbers above include 500 per month of depreciation
• Winchester Ltd intends to buy a new machine for a cost of 6,000 on 1^st March. The machine will be classified as a non-current asset and depreciated over five years on a straight line basis. Payment will be in the form of an initial deposit of 1,200 paid on 1^st March followed by 12 equal monthly instalments starting 1^st April.
• The cash balance forecast at the beginning of April is 400.

b) Alpha plc operates a retail business. Purchases are sold at cost plus 25%. The management team are preparing the cash budget and have gathered the following data:

i) The budget sales are as follows:

Month

January 90

February 100

March 80

April 120

ii) It is management policy to hold inventory at the end each month which is enough to meet the sales demand for the next half month. Sales are budgeted to occur evenly during each month.

iii) Creditors are paid one month after the purchase has been made

Calculate the entries for purchases that will be shown for February, March and April.

c) Managing costs is very important given the competitive environment in which modern businesses operate .

Discuss this statement including in your discussion some of the recent approaches to costing which have emerged to help businesses manage their costs.