Question B4:

Richard is planning to start up in business selling ice cream from around Brighton from April to September. He wants to open a business bank account, but the bank manager has insisted that he provides a cash budget together with a budgeted income statement for his six months of trading. Richard is unsure how to put this information together, but he has provided you with the following details of his planned income and expenditure:

?Richard will pay ￡5,000 of his own money on 1st of April to get the business started.

?He expects to make all his sales for cash and anticipates that he will make sales with 100% mark-up of its cost.

?At the beginning of each month, he will buy his ice cream from a local supplier and he agreed to get them in one month credit. He estimates the cost of the ice-cream to be ￡1,750 in April, ￡2,750 in May, ￡3,750 in each of the next three months and ￡1,250 in September. Richard doesn’t need to pay his supplier in April and he will follow their credit terms.

?Richard intends to sell all his ice cream by the end of September and to have no inventory at the end of this trading period.

?Ice cream vans can be hired at a cost of ￡1,500 for three months. The ￡1,500 hire charges payable at the start of each three month.

?Van running costs are estimated to be ￡250 per month payable in cash each month.

?Business insurance payable on 1st of April will cost ￡500 for six months.

?Richard will draw ￡1,000 per month out of the business bank account to meet personal expenses.

Required:

a)Prepare a cash budget for Richard covering the period of first 6 months of trading.

b)Prepare a budgeted income statement for Richard covering the period of first 6 months of trading.

c)“Budgeting is a very valuable and useful planning tool. However, it is even more valuable if it is also used as a form of control.”

Discuss the above given statement.

d) Budgeting and budgetary control systems are not neutral and have an impact on the managers, causing them to react favourably, unfavourably or with indifference.

For budgeting and budgetary control systems to work effectively, which important behavioral elements must be present?