Question 4 (Preparing the Cash Budget / 30 marks)

(Round all numbers to the nearest dollar.)

Seattle Products Ltd, a new manufacturing business started production on 1 January. Sales are planned to start in February and to be as follows for the rest of the year:

Sales units

January NA	February 400	March 500	April 600
May 700	June 800	July 900	August 800
September 800	October 700	November 600	December 500

The selling price per unit will be $100.

All sales will be made on credit. The business plans to offer a cash discount (of 2% of the amount owed) to those customers who pay by the end of the month of sale. Customers for half of all units sold are expected to qualify for the discount. For the remaining half of the units sold, customers for 95% are expected to pay during the month following the month of the sale. The remainder is expected to be bad debts.

It is planned that sufficient finished goods inventories for each months sales should be available at the end of the previous month.

1 kg of material is required to produce 1 unit of finished product. Raw material purchases will be such that there will be sufficient raw materials inventories available at the end of each month precisely to meet the following months planned production. This planned policy will operate from the end of January. Purchases of raw materials will be on two months credit (that is, buy in month 1, pay in month 3). The cost of raw material is $40 per kg.

The direct labour cost, which is variable with the level of production, is planned to be $20 per unit of finished production.

Production overheads are planned to be $20,000 each month, including $3,000 for depreciation.

Non-production overheads are planned to be $11,000 a month of which $1,000 will be depreciation.

Various non-current assets costing $250,000 will be bought and paid for during January.

Except where specified, assume that all payments take place in the same month as the cost is incurred. The business will raise $300,000 in cash from a share issue in January.

Required:

Draw up a cash budget for the six months from I January to 30 June, with a column for each month. The budget should, among other things, show each end-of-month cash balance.

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