Question

Daniel Chu Ltd, a new business, will start production on 1 April, but sales will not start until 1 May. Planned sales for the next nine months are as follows: Sales Units May 500 June July August September October 600 700 800 900 900 900 800 700 November December January The selling price of a unit will be a consistent €100 and all sales will be made on one month's credit. It is planned that sufficient finished goods inventories for each month's sales should be available at the end of the previous month. Raw materials purchases will be such that there will be sufficient raw materials inventories available at the end of each month precisely to meet the following months planned production. This planned policy will operate from the end of April. Purchases of raw materials will be on one month's credit. The cost of raw material is €40 a unit of finished product. The direct labour cost, which is variable with the level of production, is planned to be €20 a unit of finished production. Production overheads are planned to be €20.000 each month, including €3.000 for depreciation. Non- production overheads are planned to be €11.000 a month, of which €1.000 will be depreciation. Various non-current assets costing €250.000 will be bought and paid for during April. Except where specified, assume that all payments take place in the same month as the cost is incurred. The business will raise €300.000 in cash from a share issue in April. Required: Draw up the following for the six months ending 30 September: (a) A finished inventories budget, showing just physical quantities. (b) A raw materials inventories budget showing both physical quantities and financial values. (c) A trade payables budget. (d) A trade receivables budget. (e) A cash budget.

Answer 1

25 (a) A finished inventories budget, showing just physical quantities. April May June July 500 Opening Balance Inventories manufactured Less Inventories Used Ending Balance 500 600 (500) 600 600 700 (600) 700 700 800 (700) 800 August 800 900 (800) 900 September 900 900 (900) 900 500 34 (b) A raw materials inventories budget showing both physical quantities and financial values. April May June July (In Units) Opening Balance Add Purchases Less production Ending Balance 1,100 500 600 600 700 600 700 700 800 700 800 800 900 800 900 August 900 900 900 900 September 900 900 900 900 April (In £) Opening Balance Add Purchases Less Inventories Used Ending Balance 44,000 20,000 24,000 May 24,000 28,000 24.000 28,000 June 28,000 32,000 28,000 32,000 July 32,000 36,000 32,000 36,000 August 36,000 36,000 36,000 36,000 September 36,000 36.000 36,000 36,000

50 (c) A trade payables budget. April May June July August September 44,000 Opening Balance Add Purchases Cash Payment Ending Balance 44,000 28,000 44,000 28,000 28,000 32.000 28,000 32,000 32,000 36,000 32,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 44,000 59 (d) A trade receivables budget. April May June July August September 50,000 Opening Balance Add Sales Revenue Less Cash Receipts Ending Balance 50,000 60,000 50,000 60,000 60,000 70,000 60,000 70,000 70,000 80,000 70,000 80,000 80,000 90,000 80,000 90,000 50,000

58 (e) A cash budget. April May 13,000 June (70,000) July (89,000) August (104,000) September (115,000) 300,000 50,000 (20,000) 60,000 (29,000) 70,000 (34,000) 80,000 (35,000) 300,000 13,000 Opening Balance Add Share Issue Collection from Receivables Total Receipts( A) Less Payments Payment for Trade Payables Direct Labor Production Overheads (20000-3000) Non-productive Overheads (11000-1000) Purchase of Asset Total Payments (B) Ending Balance (A-B) 44,000 12,000 17,000 10,000 28,000 14,000 17,000 10,000 32,000 16.000 17,000 10,000 36,000 18,000 17,000 10,000 36,000 18,000 17,000 10,000 10,000 17,000 10,000 250,000 287,000 13,000 83,000 (70,000) 69,000 (89,000) 75,000 (104,000) 81,000 (115,000) 81,000 (116,000)