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Question 3

Kandiwa manufactures and sells a computer component .The company had a good first years trading although it 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 Financial Director, 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 50,000units Year 2 Quarter 1 50,000units Quarter 2 40,000units Quarter 3 30,000units Quarter 4 70,000units

All sales are on credit and debts are settled in the quarter following sales. Bad debts of 5% of total sales are anticipated.

The company normally holds a closing stock of 20,000 units at the end of each quarter.

The computer components are produced in batches of 2,000. Each batch requires 200 direct labour hours and 800kg 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 Required:

Prepare a cash budget for Kandiwa Manufacturers for year 2 providing quarterly balances. [15 marks]

Prepare a report setting out: The benefits of good budgetary control Typical problems encounter in exercising budgetary control. [10 marks]

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