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Question $2$ Cash Budgets

The last annual budget for Korara indicated that the company$$s budgeting milestones were not being achieved. Management is concerned with the situation and have asked you to break down the previous annual budget and use this as a basis for forecasting a budget for the next quarter. You extract the following data for the quarter ending $30$ June $2017$:

Actual Sales Forecast Sales February March April May June

$$88,000$

$$85,000$

$$96,700$

$$83,500$

$$85,000$

$55\%$ of all sales are on credit. Estimated collections are:

$60\%$ are collected in the month of sale, with a $1\mathrm{.}25\%$ discount;

$30\%$ in the month following sale; and

$10\%$ in the second month after sale.

Purchases are estimated at $70\%$ of budgeted sales for the particular month.

$75\%$ of these purchases are paid in the month of purchase and a $1\%$ discount is received; and

$25\%$ of purchases are paid in the following month.

Budgeted cash expenses in April are as follows:

Advertising

$$825$

Salaries & Wages

$8,500$

Rent

$4,150$

Interest on Loan

$525$

General Expenses

$2,100$

Due to poor economic conditions and rising levels of inflation, the company is expecting these circumstances to impact them as follows:

Salaries and wages will increase by $2\mathrm{.}5\%$ as at $1$ May.

Rent for the shop premises will increase by $3\mathrm{.}5\%$ as at $1$ June

The business will also have to pay the quarter$$s variable outgoings in June of $$3,150.$

Additional Information;

Other cash expenses will remain the same for May and June.

Drawings by the owner amount to $$7,000$ for April and increase by $$500$ for May.

In June, the owner will reduce the drawing amount to $$3,500.$

The net PAYG for the March quarter is $$2,850$ and is to be paid by the end of April.

a$)$ The Bank account balance is in overdraft on $1$ April by $$3,125.$

Required:Prepare the following Cash Budgets for the months of April, May and June and the quarter total:

Accounts Receivable Collections Budget;

Cash Payments Budget $($including Accounts Payable calculations$)$; and

Summary Cash Budget.

The company has identified $2$ key milestones and performance targets $($indicators$)$ to be achieved during the quarter:

i$.$To have a positive cash balance at the end of the quarter

ii$.$Purchase a new label printer in June costing $$3,500.$

Which of the above milestones is the company able to achieve?

$($c$)$The company had made the following forecasts at the time of preparing the budget:

Salaries and wages to increase by $2\mathrm{.}5\%$ as at $1$ May.

Rent for the shop premises to increase by $3\mathrm{.}5\%$ as at $1$ June

These forecasts were hastily made without considering the availability of industry or historical data. Industry market research showed that for this industry, the changing economic situation$$s impact on salaries and rent were as follows:

Salaries were growing by $8\%$

Rent was up by $10\%$

In view of these industry projections:

i$.$Has the company understated or overstated these costs?

ii$.$Should the company expect higher or lower profits than projected in the master budget?

iii.Which of the organisation$$s policies and procedures were not followed?

iv$.$You have been asked to review the budget development process to ensure that similar mistakes are not made. In a sentence or two, explain what steps the company could take to ensure that ALL budgeting policies and procedures are followed in the future.

$($d$)$ Given the significant differences in the budgeted salaries and rent from industry expectations, re$-$do the budget using a salary increment of $8\%$ and rent hike of $10\%($do this in a new sheet, named Question $2($d$)).$

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