QUESTION FOUR (Assume today is 31st December 2019) Ricky Mwewa has just negotiated a contract to supply 8,160 desks to all the primary schools in Muchinga Province. This is the breakthrough he has been waiting for and he has decided to start the business he has been planning for months now. The Top Desk Company Limited. The Ministry of General Education, which is responsible of ensuring good, learning conditions in all schools including primary schools, has agreed to pay K255 for each desk and wants them all delivered next year which is 2020. Ricky wishes to supply all the desks within the first six months of 2020 starting January 2020. His projection is to supply and deliver the desk evenly over the six months period. With no inventory at the start of January 2020 and at the end of the six month period as these desks are specifically for the schools in Muchinga. Ricky has opted to maintain closing inventory over the period equal to the following monthly supply: January February March April May June Inventory level 100% 50% 50% 30% 5% 0% The Ministry has advised that payment will be made the month following delivery as the procurement officers' at the schools have to thoroughly inspect the desk. Ricky has sourced a supplier who will supply the materials required to produce the desks at a price of K15 per kg of material. He is hopeful that the Ministry will ask for more desks in the near future' As he is a new customer the supplier is unwilling to give him longer credit and he will be required to pay for the materials when they are delivered which is the same month production takes place. His buying pattern is to buy as much materials as is needed for production in that month. He will not keep inventory of materials at 30% of the following month's production requirement, although in June 2020, he intends to keep it at 20% of that month's production requirement. This is to allow for production of any desks that might be damaged during transportation. On average he uses 10 kg of material to make a desk, and this is unlikely to change over the period. Ricky will need machinery to allow him to make the desk. He has seen a new machine at a recent trade show at a cost of K80,000 that he had opted to buy. He will need to pay for this machine when it is delivered in January 2020. The business plan shows that the monthly overheads of the new business will be K20,000 payable in the same month they are incurred. In additional, delivery costs have been estimated at 9% of revenue payable in the same month revenue is earned. To make sure he and his family have enough to live on, Ricky will pay himself a monthly salary of K9,000 in January 2020, increasing by 10% in February, March and April. He will then maintain the April level for the rest of the period. He has K50,000 saved up that he will pay into the business bank account in January 2020 to get the business started. Ricky has heard that you are studying for your Bachelors Degree in Accounting and has asked for some help in budgeting for the business. Required: (a) Prepare the following functional budgets for the six months to 30 June 2020. (i) Sales budget in units and value (2 marks) (4 marks) (ii) Production budget in units (iii) Materials purchases budget in kg and value (6 marks) (iv) Cash budget (8 marks) (b) Management accounting is normally said to help in planning and decision making. With the help of the budgets prepared above, explain three (3) decisions that Ricky could consider for his business to do well. (5 marks) QUESTION FOUR (Assume today is 31st December 2019) Ricky Mwewa has just negotiated a contract to supply 8,160 desks to all the primary schools in Muchinga Province. This is the breakthrough he has been waiting for and he has decided to start the business he has been planning for months now. The Top Desk Company Limited. The Ministry of General Education, which is responsible of ensuring good, learning conditions in all schools including primary schools, has agreed to pay K255 for each desk and wants them all delivered next year which is 2020. Ricky wishes to supply all the desks within the first six months of 2020 starting January 2020. His projection is to supply and deliver the desk evenly over the six months period. With no inventory at the start of January 2020 and at the end of the six month period as these desks are specifically for the schools in Muchinga. Ricky has opted to maintain closing inventory over the period equal to the following monthly supply: January February March April May June Inventory level 100% 50% 50% 30% 5% 0% The Ministry has advised that payment will be made the month following delivery as the procurement officers' at the schools have to thoroughly inspect the desk. Ricky has sourced a supplier who will supply the materials required to produce the desks at a price of K15 per kg of material. He is hopeful that the Ministry will ask for more desks in the near future' As he is a new customer the supplier is unwilling to give him longer credit and he will be required to pay for the materials when they are delivered which is the same month production takes place. His buying pattern is to buy as much materials as is needed for production in that month. He will not keep inventory of materials at 30% of the following month's production requirement, although in June 2020, he intends to keep it at 20% of that month's production requirement. This is to allow for production of any desks that might be damaged during transportation. On average he uses 10 kg of material to make a desk, and this is unlikely to change over the period. Ricky will need machinery to allow him to make the desk. He has seen a new machine at a recent trade show at a cost of K80,000 that he had opted to buy. He will need to pay for this machine when it is delivered in January 2020. The business plan shows that the monthly overheads of the new business will be K20,000 payable in the same month they are incurred. In additional, delivery costs have been estimated at 9% of revenue payable in the same month revenue is earned. To make sure he and his family have enough to live on, Ricky will pay himself a monthly salary of K9,000 in January 2020, increasing by 10% in February, March and April. He will then maintain the April level for the rest of the period. He has K50,000 saved up that he will pay into the business bank account in January 2020 to get the business started. Ricky has heard that you are studying for your Bachelors Degree in Accounting and has asked for some help in budgeting for the business. Required: (a) Prepare the following functional budgets for the six months to 30 June 2020. (i) Sales budget in units and value (2 marks) (4 marks) (ii) Production budget in units (iii) Materials purchases budget in kg and value (6 marks) (iv) Cash budget (8 marks) (b) Management accounting is normally said to help in planning and decision making. With the help of the budgets prepared above, explain three (3) decisions that Ricky could consider for his business to do well