Question

Alpha 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

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 per cent of the amount owed) to those customers who pay by the end of the month of the 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 per cent 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.

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 unit of finished product.

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 fixed 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 finished goods inventories budget, a raw materials inventories budget and a cash budget for the six months from January to 30 June, with a column for each month. The cash budget should, among other things, show each end-of-month cash balance.