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 1000 August 1500 September 2000 October 2400 November 2600 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 1450 1650 2120 2460 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 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.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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
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 |
1000 |
|
August |
1500 |
|
September |
2000 |
|
October |
2400 |
|
November |
2600 |
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
* A 4% discount will be given for immediate payment
Production
The budget production volumes in units are:
|
July |
August |
September |
October |
|
1450 |
1650 |
2120 |
2460 |
Variable production cost
The budgeted variable production cost is $90 per unit, comprising:
|
|
$ |
|
Direct materials |
60 |
|
Direct labour |
10 |
|
Variable production |
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
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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