ANSWER THE FOLLOWING

1. The information given below is in respect of the proposed budget for K.K. Ltd for the six months ending 31
December 2019.

Month Sales Material Wages Production Administrative

Purchased Overheads overheads
$’000 $ ‘000 $ ‘000 $ ‘000 $ ‘000

July 72,000 25,000 10,000 6,000 5,500

August 97,000 31,000 12,100 6,300 6,700
September 86,000 25,500 10,600 6,000 7,500
October 88,600 30,600 25,000 6,500 8,900
November 102,500 37,000 22,000 8,000 11,000
December 108,700 38,800 23,000 8,200 11,500

Additional information

 A depreciation expense is expected to be 0.5% of sales.

 Expected cash balance in hand on 1 July 2019 is $ 72,500,000.
 50% of total sales are cash sales.
 Assets are to be acquired in the months of August and October at $.8, 000,000 and $.25, 000,000
respectively.
 An application has been made to the bank for the grant of a loan of $ 30,000,000 and it is hoped that it
will be received in the month of November.
 It is anticipated that a dividend of $ 35,000,000 will be paid in December.
 Debtors are allowed one month's credit.
 Creditors for materials purchases and overheads grant one month's credit.
 Sales commission at 3% on sales is paid to the salesmen each month.

Required:

A cash budget for the six months ending 31 December 2019.

Solutions:

1.Depreciation will not affect the cash budget since it is not a cash expense.
2.50% of sales are on cash. Cash sales: July 36,000, August,48500, Sep 43000, Oct 44300, Nov 51250, Dec 54350.
3.Cash from debtors- (One month's credit) July-, August: 36,000, Sep 48500, Oct 43000, Nov 44300, Dec 51250
4. Payments on materials: July-, Aug 25000, Sep 31000, Oct 25500, Nov 30600, Dec 37000
5. Sales Commission: July 2160, Aug 2910, Sep 2580, Oct 2658, Nov 3075, Dec 3261
6. Overheads are granted one month's credit.
7.For wages if the payment mechanism is not mentioned it will be assumed to be paid in the same month.
2.The following information has been extracted from the company's budget schedules:

Sales $ Rent $ Overheads $ Wages $ Material stocks $

2019

November 500,000 80,000 180,000 40,000 272,000

December 340,000 80,000 180,000 60,000 320,000
2020

January 400,000 80,000 190,000 60,000 480,000

February 600,000 80,000 200,000 80,000 464,000
March 580,000 80,000 200,000 74,000 464,000
April 580,000 80,000 200,000 70,000 500,000

Additional information:

 The opening cash balance is 25% of November Sales.

 Purchase of material stocks is on credit, and it is paid for in the month of receipt by the company.
 Employees are paid wages at the end of every week with the earnings of the last week of the month
being settled in the following month. (Assume one month has 4 weeks)
 Sales commission is paid one month in arrears at the rate of 1% of sales.
 Overheads include a monthly depreciation charge of $ 25,000.
 25% of the sales are on cash basis. The other 75% is receivable two months after the sale.
 The company will receive a loan of $ 160,000 in the month of March 2020 from Wakulima Bank
 Old equipment will be sold for $ 250,000 in February 2020 and new equipment will be purchased at $
1,000,000 to replace the old equipment sold. The new equipment will be paid for in the month of March
2020.
 Rent is paid for quarterly in advance in the months of January, April, July and October. Required: Cash
budget for the business.

SOLUTION:

1.Opening cash balance: 500,000*25%=125000

2. Suppliers of materials are paid in the same month.
3.Payment of wages= weekly= November 2019 = 40,000/4=10,000(10,000*3) =30,000
Dec 2019= 10,000+( 15000*3) =55000(60,000/4=15000)
Jan 2020 = 15000+(15000*3) = 60,000(60,000/4=15000)
Feb 2020= 15000+( 20000*3) =75000(80,000/4=20,000)
March 2020= 20,000+ (18500*3) = 75500(74000/4)=18500
April 2020= 18500+ (17500*3) = 71000(70,000/4)=17500

4.Sales commission: Nov= 5000, Dec,3400, Jan,4000, Feb,6000, Mar,5800, April 5800
(This will be paid one month in arrears).
5.Since depreciation is not a cashflow item and does not affect cash budget, remove it from the overheads i.e
Nov. (180,000-25000) 155000. etc
6.Receipts from sales: a)Cash sales (25%) Nov=125,000, Dec= 85000, Jan=100,000, Feb=150,000,
March=145000, April= 145000 b)From Debtors (75% two months credit) 75% of November will be paid in Jan
2020= 375000 75% of December will be paid in Feb 2020= 255000 75% of Jan 2020 will be paid in March
2020= 300000 75% of Feb 2020 will be paid in April 2020= 450,000
7.PaymentOct, Nov.= Payment for Jan 2019 will cover, Jan, Feb &March 2019 ---- = Payment for April 2019 will
cover, Apri,May, Jun 2019---- = Payment for July 2019 covered July,Aug, Sep 2019---- = Payment for Oct 2019
covered, Oct,Nov,Dec 2019 ( Will not affect current budget) = Payment for Jan 2020 covered, Jan, Feb, March
2020 ( 80,000*3)=( JAN 240,000) = Payment for April 2020 will cover, April,may ,June 2020 ( 80,000*3)= ( APRIL
240,000) NOTE: The months of November& December 2019 were paid in October 2019 hence will not affect our
budget period.

NOTE: Though the months of May and June 2020 are not part of the budget period, the lumpsum paid in
advance in April is part of the budget period.