Question

QUESTION THREE

Easy Spread Ltd is a food processing company whose main product is margarine. The CEO, Grant, is contemplating expanding the business by selling its margarine products into the growing Indonesian market. He asks you, as the company’s accountant, whether financial planning structures and processes within the company are set up to deal with this expansion of operations and greater financial complexity associated with export trading.

You know that the company has developed very detailed processes for preparing its production and cash budgets. But other areas of budgeting, especially financial, and capital budgets have not been formally established. You tell the CEO you will look into it and provide him with advice in next month’s meeting.

The budget committee of the company has provided the following information:

· Cash sales are 70% of total sales.

· Debtors are expected to pay: 60% of in the month of sales; and 40% in the month following the sale.

2019 Sales

April $400,000 Actual sales

May $400,000 Actual sales

June $700, 000 Estimated sales

July $900,000 Estimated sales

REQUIRED:

(a) Prepare a schedule of expected receipts from debtors for June and July 2019. (Show all workings as part of your answer).

(b) Distinguishes between the various types of budgets and their purpose that the company should put in place as part of the overall planning and control process. (limit 120 words)

(c) Provide three examples of how the sales budget will impact budgets set in other related parts of the organization. (limit 60 words)

(d) Discuss the steps that would be necessary to establish a fully integrated set of budgets that will enable effective planning and control for the company in the future and gain positive co-ordination and behavioral change necessary to attain corporate objectives. (limit 90 words)

(e) Discuss one major advantage and disadvantage Net Present Value has as a capital evaluation technique as compared to other techniques such as Payback and Internal Rate of Return. (80 words)

Answer 1

a)

SCHEDULE OF EXCEPTED RECEIPT

Cash Receipt in June from Sales of May

$160,000

(400000*40%)

June

July

A

Estimated Sales

$700,000

$900,000

B=A*60%

Receipt from the current month's sale

$420,000

$540,000

C

Receipt from previous month's sale

$160,000

$280,000

D=B+C

Expected Receipts from debtors

$580,000

$820,000

b)

VARIOUS TYPES OF BUDGETS

Sales Budget

Estimates Sales in units and dollar for each product and for each month

Production budget

Estimates Production requirement for each product and for each month considering finished goods inventory

Raw materials Purchase Budget

Estimates Raw materials purchase in each month considering raw material inventory

Operations costs budgets

Estimates other operations costs each month

Cash budget

Estimates cash receipt,cash payments and financing need in each month

c)

Sales Budget will estimate monthly sales

It affects the production budget , because production quantity is related to quantity of sales

It Affects Cash receipt budget because receipt of cash depends on sales

It affects Sales expenses budget because variable sales expenses like commissions etc depends on sales

d)

Integrated budget starts with Sales budget

Cash recept budget is derived fromsales budget

Production budget is derived from sales budget

Sales expenses budget is derived from Sales budget

Raw materials purchase derived from production budget

Manufacturing overhead budget derived from production budget

e.

Net Present value indicates Wealth generated for the shareholders

Unlike payback method , it considers time value of money

Internal Rate of return may give more than one rate.NPV gives only one value

Disadvantage:

Deciding on the discount rate and risk is difficult

In case of mutually exclusive projects, the project selected may change with change in discount rate