QUESTION 3 (20 Marks)

REQUIRED

Use the information provided below to prepare the Cash Budget for the first three months of operations

(i.e. May, June and July 2019). Use separate money columns for each month.

INFORMATION

The following information relates to Sibiya Limited that decided to invest in a project that commences on 01 May 2019 with R200 000 cash, manufacturing a new product:

1. New machinery and equipment will be purchased on 01 May 2019 for R250 000. A deposit of 20% will be paid immediately and the balance will be paid in five equal instalments commencing June 2019.

2. Production will commence on 03 May 2019 and no inventories will be held at the end of each month.

3. Estimated production and sales from the project are:

UNITS

May 1000

June 4000

July 4500

August 5000

4. The selling price will be R100 per unit. Cash sales are expected to comprise 60% of total sales. The balance of the sales will be on credit and customers are expected to pay one month after the sale.

5. Variable production costs per unit (excluding any discounts) are as follows:

Direct materials 20

Direct labour 12

Variable overheads 10

6. Direct materials will be purchased for cash for the production requirements of each month, in order to take advantage of a 10% cash discount.

7. Direct labour costs will be settled on the last working day of each month.

8. The payment for variable production overheads will be delayed by one month.

9. Fixed manufacturing, selling and administration costs are budgeted at R70 000 per month and this amount excludes depreciation of R5 000 per month. Fixed costs are paid for in the month in whichthey are incurred.

10. Variable selling and administration expenses are expected to amount to R5 per unit sold. Fifty percent (50%) of the amount due will be settled in the month in which the costs are incurred. The balance will

be paid one month later.