ROBENS Ltd manufactures and sells an electrical component. The company have had a good first year's...

 

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ROBENS Ltd manufactures and sells an electrical component. The company have had a good first year's trading although they have struggled to manage cash flows because of initial set up costs incurred. The bank balance at the start of Year 2 is projected to be an overdraft of £85,000 and in preparation for a meeting with the account manager you have gathered the following budgetary information :- . The current sales price is currently €/£ 5.50 per unit and this is expected to increase to €/£6.00 per unit at the start of Quarter 2. Sales are projected for each quarter as follows: Year 1 Quarter 4 Year 2 Quarter 1 50,000 units 50,000 units Quarter 2 40,000 units Quarter 3 30,000 units Quarter 4 70,000 units • All sales are on credit and debts are settled in the quarter following sale. Irrecoverable debts of 5% of total revenue are anticipated. • The company normally holds a closing inventory of 20,000 units at the end of each quarter. • The electrical components are produced in batches of 2,000. Each batch requires 200 direct labour hours and 800 kg of raw materials. • Direct labour is projected at a rate of €/£16.00 per hour for Quarter 1 and at €/ 16.50 thereafter. • Raw materials cost €/£5 per kg and are expected to increase by 5% with effect from Quarter 3. The company has agreed an average of 90 days credit with its main suppliers. General overheads are projected to be €/£25,000 per month Requirement (a) Prepare a cash budget for ROBENS Ltd for Year 2, providing quarterly balances.14 marks (b) Prepare a report setting out: - the benefits of good budgetary control; ROBENS Ltd manufactures and sells an electrical component. The company have had a good first year's trading although they have struggled to manage cash flows because of initial set up costs incurred. The bank balance at the start of Year 2 is projected to be an overdraft of £85,000 and in preparation for a meeting with the account manager you have gathered the following budgetary information :- . The current sales price is currently €/£ 5.50 per unit and this is expected to increase to €/£6.00 per unit at the start of Quarter 2. Sales are projected for each quarter as follows: Year 1 Quarter 4 Year 2 Quarter 1 50,000 units 50,000 units Quarter 2 40,000 units Quarter 3 30,000 units Quarter 4 70,000 units • All sales are on credit and debts are settled in the quarter following sale. Irrecoverable debts of 5% of total revenue are anticipated. • The company normally holds a closing inventory of 20,000 units at the end of each quarter. • The electrical components are produced in batches of 2,000. Each batch requires 200 direct labour hours and 800 kg of raw materials. • Direct labour is projected at a rate of €/£16.00 per hour for Quarter 1 and at €/ 16.50 thereafter. • Raw materials cost €/£5 per kg and are expected to increase by 5% with effect from Quarter 3. The company has agreed an average of 90 days credit with its main suppliers. General overheads are projected to be €/£25,000 per month Requirement (a) Prepare a cash budget for ROBENS Ltd for Year 2, providing quarterly balances.14 marks (b) Prepare a report setting out: - the benefits of good budgetary control;

Answer rating: 100% (QA)

Part a Cash Budget for ROBENS Ltd for Year 2 Heres a quarterly cash budget for ROBENS Ltd for Year 2 Quarter Sales Revenue Collections Payments Net Cash Flow Q1 275000 262500 195000 67500 Q2 240000 24... View the full answer