Question

A new company is being established to manufacture and sell an electronic tracking device: the Trackit. The owners are excited about the future profits that the business will generate. They have forecast that sales will grow to 2,600 Trackits per month within five months and will be at that level for the remainder of the first year.

The owners will invest a total of $250,000 in cash on the first day of operations (that is the first day of July). They will also transfer non-current assets into the company.

Extracts from the company’s business plan are shown below.

Sales

The forecast sales for the first five months are:

Month Trackits (units)

July 1,000

August 1,500

September 2,000

October 2,400

November 2,600

The selling price has been set at $140 per Trackit. Sales receipts Sales will be mainly through large retail outlets. The pattern for the receipt of payment is expected to be as follows:

Time of payment % of sales value

Immediately 15 *

One month later 25

Two months later 40

Three months later 15

The balance represents anticipated bad debts.

* A 4% discount will be given for immediate payment

Production The budget production volumes in units are:

July August September October

1,450 1,650 2,120 2,460

Variable production cost

The budgeted variable production cost is $90 per unit, comprising:

$ Direct materials 60,

Direct labour 10,

Variable production overheads 20,

Total variable cost 90

Direct materials: Payment for purchases will be made in the month following receipt of materials. There will be no opening inventory of materials in July. It will be company policy to hold inventory at the end of each month equal to 20% of the following month’s production requirements.

Direct labour will be paid in the month in which the production occurs. Variable production overheads: 65% will be paid in the month in which production occurs and the remainder will be paid one month later.

Fixed overhead costs Fixed overheads are estimated at $840,000 per annum and are expected to be incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the month in which they are incurred and 15% in the following month. The balance represents a depreciation of noncurrent assets.

Required: a) Prepare a cash receipts budget schedule for each of the first three months (July – September), including the total receipts per month.

b) Prepare a material purchases budget schedule for each of the first three months (July – September), including the total purchases per month.

c) Prepare a cash budget for the month of July. Include the owners’ cash contributions

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Answer 1

All amounts are in $

The budgets are inserted as an image