The management of Rosslyn Industrial Hub has been informed that the Union representing the direct production workers at one of their factories ,where a standard product is produced, intends to call a strike. The accountant has been asked to advise the management of the effect the strike will have on cashflow The following data has been made available : Week 1 Week 2 Week 3 Budgeted sales 400 units 500 units 400 units Budgeted Production 600 units 400 units Nil The strike will commence at the beginning of week 3 and it should be assumed that it will continue for at least 4 weeks. Sales at 400 units per week will continue to be made during the period of the strike until inventory of finished goods are exhausted. Production will stop at the end of week 2.The current inventory level of finished goods is 600 units. Inventory of work in progress are not carried The selling price of the product is at R60 and the budgeted manufacturing cost is made up as follows: Direct materials 15 Direct wages 7 Variable overheads 8 Fixed Overheads 18 48 Direct wages are regarded as a variable cost .The company operates a full absorption costing system and the fixed overhead absorption rate is based upon a budgeted fixed overhead of R9000 per week. Included in the total fixed overhead is R700 per week for depreciation of equipment.During the period of the strike direct wages and variable overheads would be reduced by R1500 per week. The current inventory of raw materials are worth R7500.It is intended that these stocks should increase to R11 000 by the end of the week 1 and then remain at this level during the period of the strike .All direct materials are paid for 1 week after they have been received .Direct wages are paid 1 week in arrears.It should be assumed that all relevant overheads are paid for immediately the expense is incurred. All sales are on credit,70 percent of the sales value is received in cash from the debtors at the end of the first week after sales have been made and the balance at the end of the second week. The current amount outstanding material suppliers is R8000 and direct wages accruals amount to R3 200 .Both of these will be paid in week 1.The current blalance owing from debtors is R31 200 ,of which R24 000 will be received during week 1 and the remainder during week 2 .The current balance of cash at the bank and on hand is R1000. Required 1. Prepare a cash budget for weeks one to six showing the balance of cash at the end of each week together with a suitable analysis of the receipts and payments during each week 2. Comment upon any matters arising from the cash budget which which you consider should be bought to management attention. 3. Explain why the reported profit figure for a period does not normally represent the amount of cash generated in that period
The management of Rosslyn Industrial Hub has been informed that the Union representing the direct production workers at one of their factories ,where a standard product is produced, intends to call a strike. The accountant has been asked to advise the management of the effect the strike will have on cashflow
The following data has been made available :
Week 1 Week 2 Week 3
Budgeted sales 400 units 500 units 400 units
Budgeted Production 600 units 400 units Nil
The strike will commence at the beginning of week 3 and it should be assumed that it will continue for at least 4 weeks. Sales at 400 units per week will continue to be made during the period of the strike until inventory of finished goods are exhausted. Production will stop at the end of week 2.The current inventory level of finished goods is 600 units. Inventory of work in progress are not carried
The selling price of the product is at R60 and the budgeted
Direct materials 15
Direct wages 7
Variable
Fixed Overheads 18
48
Direct wages are regarded as a variable cost .The company operates a full absorption costing system and the fixed overhead absorption rate is based upon a budgeted fixed overhead of R9000 per week. Included in the total fixed overhead is R700 per week for
the strike direct wages and variable overheads would be reduced by R1500 per week.
The current inventory of raw materials are worth R7500.It is intended that these stocks should increase to R11 000 by the end of the week 1 and then remain at this level during the period of the strike .All direct materials are paid for 1 week after they have been received .Direct wages are paid 1 week in arrears.It should be assumed that all relevant overheads are paid for immediately the expense is incurred.
All sales are on credit,70 percent of the sales value is received in cash from the debtors at the end of the first week after sales have been made and the balance at the end of the second week.
The current amount outstanding material suppliers is R8000 and direct wages accruals amount to R3 200 .Both of these will be paid in week 1.The current blalance owing from debtors is R31 200 ,of which R24 000 will be received during week 1 and the remainder during week 2 .The current balance of cash at the bank and on hand is R1000.
Required
1. Prepare a
2. Comment upon any matters arising from the cash budget which which you consider should be bought to management attention.
3. Explain why the reported profit figure for a period does not normally represent the amount of cash generated in that period
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