Leaving Cert Accounting BUDGETING - Cash: Woods Ltd is preparing to set up

Question

Woods Ltd is preparing to set up business on 01/07/2011 and has made the following forecast for the first six months of trading:

Sales
£
July	410,000
August	430,000
September	560,000
October	580,000
November	610,000
December	3,220,000

Purchases
£
July	190,000
August	210,000
September	240,000
October	250,000
November	330,000
December	1,570,000

(i) The expected selling price is £40 per unit.

(ii) The cash collection pattern from Debtors is expected to be:

Cash Customers: 40% of sales revenue will be for immediate cash and cash discount of 5% will be allowed.

Credit Customers: 60% of sales revenue will be from credit customers. These debtors will pay their bills 50% in month after sale and the remainder in the second month after sale.

(iii) The cash payments pattern for purchases is expected to be:

Credit Suppliers: The purchases will be paid for 50% in the month after purchase when a discount of 2% will be received. The remaining purchases will be paid for in the second month after purchase.

(iv) Expenses of the business will be settled as follows:

Expected Costs:
Wages £40,000 per month payable as incurred
Variable overheads £10 per unit payable as incurred
Fixed overheads (including depreciation) £45,000 per month payable as incurred

Capital Costs:
Equipment will be purchased in July costing £48,000 which will be useful for life of 5 years. To finance this purchase a loan of £44,000 will be secured at 9% per annum. Interest to be paid monthly, but capital loan repayments will not commence until January 2012.

You are required to:
(a) Prepare a cash budget for six months July to December 2011.
(b) Prepare a budgeted profit and loss account for the six months ended 31/12/2011.
(c) What is an adverse variance? State why adverse variances may arise in direct material costs.

Prepare a cash budget for six months July to December 2011.

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