Tokyo Ltd manufactures one product; ZYX. The financial director of Tokyo Ltd has asked for your assistance in producing the cash budget for the month of June 20X1. The sales and production budgets for the months of April, May, and June 20X1 have already been prepared and you are provided with the following data:

The following additional information has also been provided to you:

• Each unit of ZYX requires 2 kg of materials and incurs 30 minutes of direct labor to be completed. The cost price of materials is £0.50 per kg while direct labor is paid at the rate of £12 per hour. All of the firm’s direct labor are on zero-hour contracts.

• Variable production overheads are incurred in direct proportion to the number of direct labor hours worked and the rate is £1.20 per direct labor hour.

• Monthly fixed production overheads are £12,000, including a fixed depreciation charge of £1,000 for machinery and equipment. Other fixed administration and selling overheads are £2,000 per month.

• Tokyo Ltd pays for its purchases of materials one month after the purchase.

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Quarter

675,000 757,500

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• Wages for labor are paid in the month they are incurred. All of the fixed overheads (production, administration, and selling) are paid for one month in arrears, i.e., the following month. Half of the variable production overheads are paid in the month incurred and the remainder the following month.

• Tokyo Ltd sells each unit of ZYX at £10. 30% of its customers pay the month following their purchases. Another 30% takes two months to pay and the remainder is on a cash basis. Tokyo Ltd allows a 5% cash discount on all its cash sales and it does not anticipate any bad debt in the foreseeable future. 

• Required:

  (a) Prepare Tokyo’s cash budget for the month of June 20X1. Assume the firm will have a cash balance of £90,000 on the 1st of June 20X1. 

(b) Describe the main objective of a cash budget.
 

April May June Quarter Sales budget (unit) 200,000 225,000 250,000 675,000 Production budget (unit) 227,500 252,500 277,500 757,500