Question

Question 2                                                                                  (Total: 25 marks)

The following is the forecast from April to August 2019 for Almari Magick Company:

	April RM’000	May RM’000	June RM’000	July RM’000	August RM’000
Cash sales	50	60	55	65	40
Credit sales	800	750	675	600	550
Materials purchased	400	440	460	400	420
Wages and salaries	80	100	120	100	112
Factory overhead expenses	135	145	160	155	145
Other overhead expenses	90	85	92	112	102

Additional details are:

(1) One half of the remaining trade receivables will pay in the month after sales; the other one half will take an additional month’s to make payment.

(2) One half of the amount owing to trade payables for materials is paid in the month of purchase. The other half is paid in the month following purchase.

(3) 75% of wages and salaries are paid in the month in which they are incurred; the remainder will be paid in the following month.

(4) Depreciation of plant and machinery is included in the above factory overhead expenses, which is RM45,000 per month.

(5) Depreciation of office equipment is included in the above other overhead expenses, which is RM12,000 per month.

(6) All overhead expenses are paid in the month following the month in which they are incurred.

(7) Plant will be sold in July for RM5,000 in cash, incurring a loss on disposal of RM22,500.

(8) RM102,900 is to be paid in July for purchase of an additional freehold building.

(9) A dividend of RM50,300 is to be paid in August.

Required:

a) Assuming a bank overdraft of RM70,000 on 31 May, prepare a tabular Cash Budget for each of the three months of June, July and August.                             

b) Discuss three (3) key benefits companies get from preparing the budget.              

Answer 1

1.The cash budget is presented in the first 2 pictures. Second picture is the continuation of the table in first picture.

The closing balance of:

• June is 7, 000 cash
• July is 38400 overdraft
• August is 1, 30, 200 overdraft

The third picture is a working note. It shows the details of payment for credit sales received during June to August.

Note:- It is assumed that Factory overhead expenses are paid in the month in which they are incurred. Depreciation is a non cash expense and hence reduced from factory overheads and other overhead expense

2.Benefits of preparing cash budget

• It helps to identify any shortage of cash. So we can plan ahead and arrange extra funding such as a bank overdraft.
• It can help to regulate and plan expenses.For example, It helps forsee shortage of cash, so that we can reduce unwanted expenses, if any.
• This will allow a business to plan more effectively and make better & informed decisions.