Question

Dogo is planning to open a retail shop on 1/5/2019. He would put in $25,000 cash as capital. He also has the following plans:

i) On 1/5/2019, to buy and pay for premises costing $20,000, furniture and fittings = $3,000 and motor vehicle = $1,000.

ii) To employ 2 assistants each to get a salary of $130 per month, to be paid at the end of each month (ignore PAYE tax and national insurance contribution).

iii) To buy the following goods (in units):

	May	June	July	August	September	October
Units	200	220	280	350	400	330

iv) To sell the following number of units:

	May	June	July	August	September	October
Units	120	180	240	300	390	420

v) Units will be sold for $10 each. One-third of the sales are for cash and the rest are on credit. These later customers are expected to pay their account in the second month following the month of sales.

vi) The units will cost $6 each from May to August inclusive and $7 each thereafter. Creditors will be paid in the month following purchases (value the inventories on FIFO basis).

vii) Other expenses = $150 per month payable in the month following the month they were incurred.

viii) Part of the premises will be sublet as an office at a rent of $600 per annum. This is paid in equal installment in July, October, January and April.

ix) Dogo’s cash drawing will amount to $250 per month.

x) Depreciation is to be provided on shop fixtures at 10% per annum and 20% per annum on motor vehicles.

Required:

a) Prepare a cash budget for the six (6) months ended 31/10/2019 showing the balances of cash at the end of each month. [15 marks]

b) Your newly appointed Managing Director is preparing to deliver a paper on the need to keep budgets clean and use it as a model of change in the organisation. As the Management Accountant of your organisation, briefly explain to him FIVE ways of making budgeting very effective. [10 MARKS]

Answer 1

Cash Budget

	May	June	July	August	September	October
Opening balance (A)	NIL	890	(370)	(600)	(740)	(600)
Receipts:
Cash sales	120×10/3 = 400	180×10/3 = 600	240×10/3 = 800	300×10/3 = 1000	390×10/3 = 1300	420×10/3= 1400
Collection from accounts Receivable			120*10*2/3 = 800	1200	1600	2000
Rent from sub let			600/4 = 150			150
Capital Contribution	25,000
Total Receipts (B)	25,400	600	1,750	2,200	2,900	3,550
Payments:
Assistant salary	130×2 = 260	260	260	260	260	260
Payments to Accounts Payable		200*6= 1200	220*6=1320	280*6 =1680	350*6 = 2100	400*7 = 2800
Other expenses		150	150	150	150	150
Drawings	250	250	250	250	250	250
Premises purchased	20,000
Furniture and fittings purchased	3,000
Motor vehicle purchased	1,000
Total Payments (C)	24,510	1,860	1980	2,340	2,760	3,460
Ending Balance (A+B-C)	890	(370)	(600)	(740)	(600)	(510)

Ways of making budget flexible:

1. Make a master budget and corresponding flexible budgets.
2. Make the budget cover all aspects of income and likely expenses.
3. Keep the budget targets achievable and realistic.
4. Decide upon implementation plans to make business budget effetive
5. Decide upon plans to monitor and compare the actual results with budgeted to look for discrepancies and variations.