Question

Question four (assume today is 30 December 2020)

The following information relates to Kamelwa limited a retail grocer engaged in buying and selling of foodstuffs.

(1) Budgeted sales (2021) :

January February March April May June July

August September October November December January (2022)

K500,000 K450,000 K625,000 K700,000

K665,500 K781,000 K718,750

K593,750 K812,500 K780,000 K850,000 K1,020,000

K620,000

Basic

Super

Delux

4

(2) Kamelwa limited sells its purchases at cost plus 25% mark- up.

(3) Kamelwa has a policy to hold inventory at the end of each month which is

sufficient to meet sales demand in the next half month. Sales are budgeted to

occur evenly during each month.

(4) Purchases are paid for in the following manner: 50% in the month of purchase

and the remainder in the month after purchase.

(5) Sales are 85% on credit basis and 15% cash basis.

Credit sales are collected as follows: 60% in the month following the sale;

20% the second month after the sale and 20 % the third month after the sale.

(6) Labour is remunerated at 10% of cost of sales and is paid for in the month

that it is incurred.

(7) Overheads incurred in the production department are 70% of labour cost.

These overheads are paid 30% in the month they are incurred and the

balance the following month.

(8) An auction sale conducted on 29 December 2020 resulted into disposal of

property worth K600,000 which amount (cash) will be collected on 29 January

2021.

(9) The company will pay the last company tax balance for the period 2020 on 30

June 2021 amounting to K85,000.

REQUIRED

(a) Prepare Kamelwa’s limited cash budget for the year 2021.

(b) Discuss the circumstances under which each of the following budgets might

be used .

- Rolling budget

- Zero based budget ( 6 marks)

5

Answer 1

Cash Budget of Kamelwa Limited for the year 2021	Question 1
Particulars	January	February	March	April	May	June	July	August	September	October	November	December
A.Opening Balance	0	436600	290940	141050	95940	81254.6	-12879	62738.5	134869	112839	115484.5	66991
Add: Receipts
	Receipt from Sales (Working Note 1)
	Cash Sales	75000	67500	93750	105000	99825	117150	107813	89062.5	121875	117000	127500	153000
	Credit sales receipts	0	255000	314500	480250	539750	564655	630445	612468	557770	637500	636862.5	704225
	Collection from disposal of property	600000
B	Total Receipits	675000	322500	408250	585250	639575	681805	738258	701530	679645	754500	764362.5	857225
Less: Payments
	Purchase = (Working Note 2)	190000	405000	480000	538100	562400	589250	562450	543750	599750	644500	700000	702000
	Labour cost (10% of cost of Sales ) WN-3	40000	36000	50000	56000	53240	62480	57500	47500	65000	62400	68000	81600
	Overhead payment ( WN 4)	8400	27160	28140	36260	38620.4	39208.4	42690.2	38150	36925	44954	44856	50456
	Taxes for the year 2020						85000
C	Total Payments	238400	468160	558140	630360	654260	775938	662640	629400	701675	751854	812856	834056
	Closing Balance (A+B-C)	436600	290940	141050	95940	81254.6	-12879	62738.5	134869	112839	115485	66991	90160
	Opening balance is not given and sales details of previous year is also not available

Working Note 1
Calculation of receipt on Sales
	January	February	March	April	May	June	July	August	September	October	November	December	Jan-22
Sales	500000	450000	625000	700000	665500	781000	718750	593750	812500	780000	850000	1020000	620000
a. Cash Sales ( 15% of total sales)	75000	67500	93750	105000	99825	117150	107813	89062.5	121875	117000	127500	153000	93000
Credit Sales (85% of total sales)	425000	382500	531250	595000	565675	663850	610937.5	504687.5	690625	663000	722500	867000	527000
b. Collection from debtors
i. 60% of previous months credit sales		255000	229500	318750	357000	339405	398310	366562.5	302812.5	414375	397800	433500
ii. 20% of 2nd last months sales			85000	76500	106250	119000	113135	132770	122187.5	100937.5	138125	132600
iii. 20% of 3rd previous months sale				85000	76500	106250	119000	113135	132770	122187.5	100937.5	138125
b.Collection from debtor (i+ii+iii)	0	255000	314500	480250	539750	564655	630445	612468	557770	637500	636863	704225
Total collection (a+b)	75000	322500	408250	585250	639575	681805	738258	701530	679645	754500	764363	857225
WN 2; Calculation of purchase
	January	February	March	April	May	June	July	August	September	October	November	December	Jan-22
Sales	500000	450000	625000	700000	665500	781000	718750	593750	812500	780000	850000	1020000	620000
Cost of Sales	400000	360000	500000	560000	532400	624800	575000	475000	650000	624000	680000	816000	496000
Amount of purchase to be made during the month
a. Half of requirement of current month	200000	180000	250000	280000	266200	312400	287500	237500	325000	312000	340000	408000
b. Half of the requirement of next month	180000	250000	280000	266200	312400	287500	237500	325000	312000	340000	408000	248000
Total purchse during the period (a.+b.)	380000	430000	530000	546200	578600	599900	525000	562500	637000	652000	748000	656000
Payment Method
i. Half of the current month purchase	190000	215000	265000	273100	289300	299950	262500	281250	318500	326000	374000	328000
ii. Half of the previous month purchase		190000	215000	265000	273100	289300	299950	262500	281250	318500	326000	374000
Total Payment against purchase	190000	405000	480000	538100	562400	589250	562450	543750	599750	644500	700000	702000
WN 3: Calculation of labour cost
	January	February	March	April	May	June	July	August	September	October	November	December
Cost of sales ( Sales/125%)	400000	360000	500000	560000	532400	624800	575000	475000	650000	624000	680000	816000
Labour cost ( 10% of cost of sales)	40000	36000	50000	56000	53240	62480	57500	47500	65000	62400	68000	81600
(Paid in same month)
WN 4: Computation of Overhead Cost
Labour cost ( 10% of cost of sales)	40000	36000	50000	56000	53240	62480	57500	47500	65000	62400	68000	81600
Overhead Cost (70% of Labour cost)	28000	25200	35000	39200	37268	43736	40250	33250	45500	43680	47600	57120
Payment on overhead
a. 30% in the same month	8400	7560	10500	11760	11180.4	13120.8	12075	9975	13650	13104	14280	17136
b. 70% in the next month		19600	17640	24500	27440	26087.6	30615.2	28175	23275	31850	30576	33320
Overhead payment (a+b)	8400	27160	28140	36260	38620.4	39208.4	42690.2	38150	36925	44954	44856	50456

Answer to Question 2

Answer to Part B

Zero-Based Budgeting

Ø Typically, budgets are developed by beginning with the current period’s actual or the current period’s budgeted figures and adjusting them for any changes anticipated in the coming period. This process assumes that the budget period will be related to the current period. The focus is on things that are expected to change during the coming year. This approach to budgeting is called an incremental approach.

Ø Under zero-based budgeting, the budget is prepared without any reference to, or use of, the current period’s budget or the likely operating results for the current period.

Ø Zero based budgeting can be adopted if there is no previous data available or the company is new in the industry.

Continuous (Rolling) Budgets

Ø A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time ahead of the present. For example, a one-year continuous budget would be prepared at the end of every month for the next twelve months (Up to date).

Ø Continous budget is usually prepared when the circumstances are constantly changing. This budget will help to update with each changes

Ø Preparation of rolling budgets is not advisable when the circumstances or conditions are not constantly changing. It may be a waste of your time and resources to prepare rolling budgets in unvarying environments. If your business is not exposed to extremely varying elements of commerce or the greater economy, a rolling budget will be an unwise choice.