Cash Budgeting Greene Lid is preparing to set up business on 1/1/2010 to manufacture a single product - Leaving Cert Accounting - Question 9 - 2009

To create the Materials Purchases Budget, we will determine the quantity of materials required based on the production budget and the additional requirements for raw materials.

Materials Required Per Unit

• Each unit requires 4 kg of material X.

Materials Requirement Calculation

• Production in kg for each month:
  • January: 13,100 units × 4 kg/unit = 52,400 kg
  • February: 9,400 units × 4 kg/unit = 37,600 kg
  • March: 10,600 units × 4 kg/unit = 42,400 kg
  • April: 11,300 units × 4 kg/unit = 45,200 kg

Closing Stocks Calculation

• Closing stock held at 10% of next month’s requirement:
  • January: 10% of February (37,600) = 3,760 kg
  • February: 10% of March (42,400) = 4,240 kg
  • March: 10% of April (45,200) = 4,520 kg
  • April: 10% of May (not provided, assume subsequent month needs to maintain 10%)

Total Material Requirement Calculation Total Materials Required for Purchase = Production Requirement + Closing Stock - Opening Stock:

• January: 52,400 + 3,760 - 0 = 56,160 kg
• February: 37,600 + 4,240 - 3,760 = 38,080 kg
• March: 42,400 + 4,520 - 4,240 = 42,680 kg
• April: 45,200 + 4,520 - 4,520 = 45,200 kg

Cost of Raw Materials

• Cost of raw materials is €1.50 per kg.

Thus, the Materials Purchases Budget is:

Month	Kg Required	Cost (€)
January	56,160 kg	€84,240
February	38,080 kg	€57,120
March	42,680 kg	€64,020
April	45,200 kg	€67,800

The Cash Budget summarizes cash inflows and outflows for each month, and provides insight into the overall cash position.

Cash Receipts Calculation:

• Cash sales = 30% of sales revenue
• Credit sales:
  • 50% collected in month after sale
  • 50% collected in second month after sale

Sales Revenue Calculation:

• January: €240,000
• February: €255,000
• March: €300,000
• April: €330,000

Cash Receipts by Month:

• January:

  • Cash Sales: 30% of €240,000 = €72,000
  • Credit Sales: €0 (no previous month)
  • Total January Receipts = €72,000

• February:

  • Cash Sales: 30% of €255,000 = €76,500
  • Credit January Sales: 50% of €240,000 = €120,000
  • Total February Receipts = €196,500

• March:

  • Cash Sales: 30% of €300,000 = €90,000
  • Credit February Sales: 50% of €255,000 = €127,500
  • Total March Receipts = €217,500

• April:

  • Cash Sales: 30% of €330,000 = €99,000
  • Credit March Sales: 50% of €300,000 = €150,000
  • Total April Receipts = €249,000

Cash Payments Calculation:

• Wages: €20,000/month
• Variable Overheads: based on production units designated as €5/unit
• Fixed overhead: €29,000/month
• Equipment interest: €200/month

Total Cash Outflows by Month:

• January: Wages + Overheads + Fixed = €20,000 + €0 + €29,000 = €49,000
• February: €20,000 + (9,400 units × €5) + €29,000 = €77,000
• March: €20,000 + (10,600 units × €5) + €29,000 = €81,000
• April: €20,000 + (11,300 units × €5) + €29,000 = €85,000

Cash Budget Summary

Month	Cash Receipts	Cash Payments	Net Cash Flow	Closing Balance
January	€72,000	€49,000	€23,000	€23,000
February	€196,500	€77,000	€119,500	€142,500
March	€217,500	€81,000	€136,500	€279,000
April	€249,000	€85,000	€164,000	€443,000

For the Budgeted Trading and Profit and Loss Account, we summarize all the income and expenses to determine the net profit.

Sales

• Total Sales Revenue = €1,125,000.

Cost of Sales

• Opening Stock: €0 (new business)
• Purchases include:
  • Closing Stock of Finished Goods: (6,900 units × €20) = €138,000
  • Raw materials = (4,360 kg × €1.50) = €6,540. Total Purchase Cost: €272,940.

Gross Profit Calculation:

• Gross Profit = Sales - Cost of Sales:
  • Gross Profit = €1,125,000 - (€138,000 + €272,940)
  • Gross Profit = €1,125,000 - €410,940 = €714,060.

Expenses Calculation

• Wages = €80,000
• Variable Overhead = (Units Sold) = €56,000
• Fixed Overheads = €114,000
• Depreciation = €2,000
• Interest expense = €200 (loan interest)

Total Expenses = €80,000 + €56,000 + €114,000 + €2,000 + €200 = €252,200.

Net Profit Calculation:

• Net Profit = Gross Profit - Total Expenses:
• Net Profit = €714,060 - €252,200 = €461,860.

Thus, the Budgeted Trading and Profit and Loss Account is:

Items	Amount (€)
Sales	1,125,000
Less Cost of Sales	(410,940)
Gross Profit	714,060
Less Expenses	(252,200)
Net Profit	461,860

In estimating the expected sales for the first six months, Greene Lid considered several important factors:

Market Research

• Conducting thorough market research to determine customer preferences and demand dynamics.

Historical Data

• Reviewing sales data from similar products in the market to project expected demands.

Sales Trends

• Analyzing trends in sales over past periods to identify patterns that could influence the current forecast.

Competition Analysis

• Assessing the competitive landscape and understanding the pricing strategies and promotional activities of competitors.

Economic Conditions

• Considering the overall economic conditions that might impact consumer purchasing behavior and sentiment.

Product Features

• Highlighting the unique features and benefits of the product that could attract customers and drive sales.

Marketing Strategy

• Planning and projecting the effectiveness of planned marketing and advertising campaigns to boost product visibility and interest.

By taking these factors into account, Greene Lid set a realistic sales target of 59,000 units for the upcoming months.