Spears Limited is engaged in manufacturing of special component (KWQ 12) be used in for calculators. As a step towards reducing uncertainty over the finance needs of the new business, the

Spears Limited is engaged in manufacturing of special component (KWQ 12) be

used in for calculators. As a step towards reducing uncertainty over the finance

needs of the new business, the finance manager has asked you to prepare a cash

budget for Spears Ltd for the nine (9) months period from 1 January 2014 till 30

September 2014.

You have collected some raw data from the concerned department heads and

tabulated them as follows:

a) The following are sales for the nine month period are as follows:

Sales Forecast

Month Estimated Sales Units

January 250,000

February 255,000

March 264,000

April 290,000

May 315,000

June 340,000

July 365,000

August 270,000

September 257,000

The estimated selling price per special component is $5.00.

The collections for the above sales forecast are as follows:

i. Collection from customers within the month of sale = 10% ( deemed to be

cash sales)

ii. Collection from customers following the month of sale = 50%

iii. Collection from customers following the second month of sales = 30%

iv. 10% of the sales are estimated to become irrecoverable.

b) Direct materials are acquired one month prior to production and are paid the

following month of purchase. One special component (KWQ 12) uses 2 units of

direct materials. The company keeps stock of 25% of the next months

estimated sales.

Balance of direct materials as at 31 December 2013 amounts to 140,000 units

of direct material at $0.25 per unit. There is no change in the cost direct

material.

2

c) The Direct Labour cost is paid in the month when such costs are incurred.

The number of hours estimated are as follows:

January February March April May June July August September

120,000 125,000 130,000 128,000 142,000 154,000 165,000 178,000 190,000

The company pays $1.50 per direct labour hour.

d) Operating Expenses are estimated to be $332,000 per month and this is paid

end of the month in which it is incurred. Included in the operating expenses are

depreciation charges worth $15,000.

e) Income tax payments of $ 60,000 are due both in March and June 2014.

f) Spears Ltd’s Cash on Hand on 31 December 2013 was $500,000

To receive full credit on this assignment, please show all workings, including

formulas and calculations used to arrive at the financial values.

Required:

Prepare the following budgets:

1) Sales [4.5 marks]

2) Direct Materials Purchase Budget [9 marks]

3) Direct Labour Budget [4.5 marks]

4) Prepare a monthly cash budget for Spears Ltd for the 9-month period of

January to 30 September 2014. [20 marks]

Format and presentation [2 marks]

Total 40 Marks

Leave a Comment