"Reach the Heights" has a chain of specialist shops which provide semi bespoke equipment for climbers. This means that in many cases the standard equipment is adjusted or modified to meet the dimensions of the climber and the type of terrain the climber will operate in. The advisors are professional instructors and safety personnel. The branches are expected to create their own budget, to make a profit and to remain solvent. Each branch also prepares actual performance statements. The Northumberland Branch has the following information for the first three months of 2022 Opening Balances Receivables 80,000 3,000 Bank Current liabilities Trade Payables 20,000 Estimates for the functional budgets for 2022: January February March Sales revenue Advice 102,000 90,000 72,000 Equipment 68,000 60,000 48,000 Expenses Wages 26,000 23,000 23,000 Administrative overhead 13,100 14,900 16,100 Additional information i) All sales represent 60% advice to the customer 40% equipment. Sales are on credit, typically 50% of customers, pay in the month after sale, 50% two months after sale. Receivables are to be paid at 50% in month 1 and 50% in month 2. Direct material purchases represent 40% of the sales equipment revenue and are purchased as required by the client. There is no inventory. ii) iii) Purchases of materials are paid for in the month after purchase. Trade payables at the beginning of the year will be paid in month 1. iv) Wages and administrative costs are paid in the month in which they are incurred. v) A commission of 5% of sales revenue for advice is paid to employee advisors. This is separate from the wages figures shown above. vi) Administrative overhead estimates shown above include the monthly depreciation of 2,000 per month. vil) Overdraft interest is 1% per month based on the previous monthly balance. Required: a) Prepare: i) a monthly Cash Budget for the first three months of the year, indicating the bank balance at the end of each month. Briefly comment on the information provided by the cash budget. (7 marks) ii) a budgeted Income Statement for each month of the three month period and a Statement of the Closing balances for 31st March 2022. Briefly comment on the budgeted profit performance. (5 marks) b) The actual results for the three months were. January February March Sales revenue Advice 122 60 40 Equipment 40 30 30 Expenses Wages Administrative overhead Selling commission Prepare an income statement using the actual figures shown above and briefly comment on the trends compared to the budget. (7 marks) c) The manager points out that due to travel restriction during lockdown many climbers could not follow their hobby. The industry average sales have fallen by: February Sales Revenue Advice 60% Equipment 30% Using these figures for February, calculate the planning and operating sales variances, and explain their meaning. (6 marks) (total 25 marks) 236 253 13 20 15 252 20 15
