Question

Alberto Ltd is a dealer in electronic goods. The following information relates to the period July 2021 to September 2021.

1. The bank balance on 31 July 2021 is expected to be Rs45 000 (credit).

2. Sixty percent of all sales are for cash; the balance is on credit. Cash sales for June and July 2021 are expected to be R240 000 and R300 000 respectively. Cash sales are expected to increase by 5% per month while credit sales are expected to increase by 10% per month. Sixty percent of credit customers are expected to pay after one month for a cash discount of 2%. The remaining customers will pay after two months, but 5% of them are expected to be bad debts.

3. Alberto Limited sells its electronic goods at cost plus 100%. All goods that are sold each month are replaced in the same month. All purchases are on credit and creditors are paid one month after the purchase.

4. Salaries and wages are expected to cost Rs82 500 for September 2021 after a 10% increase takes effect from 01 September 2021.

5. Advertising expenses are expected to be 5% of monthly sales, and are paid one month later.

6. Equipment costing R200 000 is expected to be purchased during August 2021. A deposit of10% will be paid in August and the balance payable in 6 equal instalments commencing September 2021.

7. A long-term loan of Rs180 000 at 12% per annum interest is to be raised on 01 September 2021. Interest is payable quarterly in advance with the first interest payment to be made on 01 September 2021.

8. Other expenses, including depreciation of Rs4 000, are expected to amount to Rs46 000 each month and payments are made monthly.

9. An interim dividend of 6 cents per share is expected to be paid on 31 August 2021. The authorised share capital of Alberto Limited consists of 800 000 ordinary shares of which 500 000 shares were issued.

REQUIRED

Use the information provided to prepare a Cash Budget for Alberto Limited for August and September 2021 (use separate columns for each month):

PART B

Distinguish between Incremental Budgeting and Zero Based Budgeting (ZBB).

Answer 1

1.

Preparation of Cash Budget for Alberto Limited for August and September 2021

SI.No	Particulars	Working Note	August 2021	September 2021
1	Opening Balance	1	(6400)	45000
2	Receipts
	Credit sales amount	2	178400	205360
	Cash sales amount	2	315000	330750
	Loan amount		0	180000
	Total of 2		432600	716110
3	Expenses
	Purchases	3	250000	267500
	Salaries and wages	4	75000	82500
	Advertisment	5	25000	26750
	Equipment Purchased	6	20000	30000
	Intrest on loan	7	0	5400
	Other Expenses	8	42000	42000
	Dividend paid	9	30000	0
	Total of 3		442000	454150
	Closing balance		45000	306960
	(1+2-3)

workinng notes

1	opening balance +Receipts -Expences = Closing balance
	opening balance +432600-442000=45000
	Opening balance of August =	54400

2	Sales			June	July	August	September
	Cash Sales	60%		240000	300000	315000	330750
	Credit sales	40%		160000	200000	220000	242000
	Total sales			400000	500000	535000	572750
	60% of Credit sales received in following month
	July month sale (200000*60% = 120000, with 2% cash discount 120000-2%)		117600
	August month sale (220000*60% = 132000, with 2% cash discount 132000-2%)		129360
	40% of Credit sales received in 2nd month
	June month sale (160000*40% = 64000, with 5% bad debt 64000-5%)		60800
	July month sale (200000*40% = 80000, with 5% bad debt 80000-5%)			76000
	Credit sales amount					178400	205360
	Cash sales amount					315000	330750

3	Purchases
			June	July	August	September
	cost (Balancing figure)	100	200000	250000	267500	286375
	Mark up	100	200000	250000	267500	286375
	sales	200	400000	500000	535000	572750
	Amount paid with one month credit			200000	250000	267500

4	Salaries and wages for september 2021 is 82500 after a 10% increase
	August = 82500*100/110
	75000

5	Advertisment expenses
				June	July	August	September
	Sales			400000	500000	535000	572750
	5% of sales			20000	25000	26750	28637.5
	Paid with one month credit				20000	25000	26750

6	Equipment Purchased =200000
	10% will be paid in August (200000*10%)		20000
	Balance amount (200000-20000)		180000
		August	September	October	November	December	January	February
	Equipment	20000	30000	30000	30000	30000	30000	30000

7	Intrest on loan
	180000*12%*3/12
	5400

8	Other Expenses	46000
	depreciation	-4000
	Other Expenses excluding depreciation	42000
9	Dividend Paid
	500000 shares *0.06
	30000

2. Difference between Incremental Budgeting and Zero Based Budgeting (ZBB).

SI.No	Incremental	Zero-based Budgeting
1	Incremental budgeting adds an allowance for changes in revenues and costs for the upcoming year by taking the current year’s budget/actual performance.	Zero-based budgeting considers revenues and costs from scratch by estimating all results disregarding the current performance.
2	Responsiveness
	Incremental budgeting is less responsive to market alterations.	Zero-based budgeting is better equipped to incorporate changes in the market.
3	Time and Cost
	Incremental budgeting is less time-consuming and cost effective.	Zero-based budgeting is very time consuming and costly due to the need to adopt a detailed approach.