QUESTION Castlewood The owner of Castlewood Limited has approached you for advice regarding cash management in her company. The cash balance at the 31st December 2004 was 35,000. Sales amounted to 25,000 units (160.000) in November and 28,000 units (179,200) in December. The following cash movements have been estimated for 2005: Fixed overhead is estimated at 342,000 per annum, including 62.000 depreciation. Costs are expected to be incurred in equal amounts each month. Fixed overhead is paid one month after the month it is incurred. Fixed overheads incurred in 2004 amounted to 300,000, which included depreciation of 26,000. The estimated sales for the first six months are: 1. 2. January February March April May June Units 22,000 18,000 26,000 18,000 24,000 28,000 140,800 115,200 166,400 115,200 153,600 179,200 4. 3. It is estimated that 20% of customers will pay cash and receive a discount of 5p. 32% will pay one month after sale and 48% will pay two months after sale. 25% of each month's sales volume is to be produced the previous month, 75% to be produced in the month of sale. 5. 50% of raw materials required for each month's production will be purchased in the previous month. One month's credit on raw material purchases is taken. 6. Direct wages is to be paid in the current month 7. Advertising expenditure to be incurred in February 2002 will amount to 25,000. Salesperson's bonus' are to be paid at the end of each quarter amounting to 3% of revenue in that quarter. 9. Credit of one month is taken on variable production overhead. 10. The production cost per unit is expected to be: Direct materials 1.50 Direct wages 2.80 Variable production overhead 0.40 4.70 8. 11. Equipment is to be purchased in January for 55,000. (It has been decided not to depreciate this equipment for the first six months). REQUIRED: (a) Prepare a cash budget for Castlewood Limited for the first quarter (January, February and March) of 2005. (b) Comment on the results you have arrived at in (a) and offer sound advice to the owner of Castlewood Limited on matters that you consider appropriate. QUESTION Castlewood The owner of Castlewood Limited has approached you for advice regarding cash management in her company. The cash balance at the 31st December 2004 was 35,000. Sales amounted to 25,000 units (160.000) in November and 28,000 units (179,200) in December. The following cash movements have been estimated for 2005: Fixed overhead is estimated at 342,000 per annum, including 62.000 depreciation. Costs are expected to be incurred in equal amounts each month. Fixed overhead is paid one month after the month it is incurred. Fixed overheads incurred in 2004 amounted to 300,000, which included depreciation of 26,000. The estimated sales for the first six months are: 1. 2. January February March April May June Units 22,000 18,000 26,000 18,000 24,000 28,000 140,800 115,200 166,400 115,200 153,600 179,200 4. 3. It is estimated that 20% of customers will pay cash and receive a discount of 5p. 32% will pay one month after sale and 48% will pay two months after sale. 25% of each month's sales volume is to be produced the previous month, 75% to be produced in the month of sale. 5. 50% of raw materials required for each month's production will be purchased in the previous month. One month's credit on raw material purchases is taken. 6. Direct wages is to be paid in the current month 7. Advertising expenditure to be incurred in February 2002 will amount to 25,000. Salesperson's bonus' are to be paid at the end of each quarter amounting to 3% of revenue in that quarter. 9. Credit of one month is taken on variable production overhead. 10. The production cost per unit is expected to be: Direct materials 1.50 Direct wages 2.80 Variable production overhead 0.40 4.70 8. 11. Equipment is to be purchased in January for 55,000. (It has been decided not to depreciate this equipment for the first six months). REQUIRED: (a) Prepare a cash budget for Castlewood Limited for the first quarter (January, February and March) of 2005. (b) Comment on the results you have arrived at in (a) and offer sound advice to the owner of Castlewood Limited on matters that you consider appropriate
