70.2K

Verified Solution

Link Copied!

QUESTION 3 Tabs Ltd is a rapidly growing distributor of medical products to retail outlets. It is in the process of formulating plans for the first half of next year. The marketing manager has completed his sales budget for 2022 and is confident that sales estimates will be met or exceeded. The following sales figures show the growth expected. Jan Budgeted sales for 2022 (all on credit): 1,800,000 Feb 2,000,000 Mar 1,800,000 April 2,200,000 May 2,500,000 June 2,800,000 I You are the new financial controller and have been given responsibility for formulating the cash budget, a critical element during a period of rapid expansion. The following information provided by operating managers will be used in preparing the cash budget: (i) The company has experienced an excellent record in trade receivable collection and expects this trend to continue. 60% of sales invoices are collected in the month after sale and the remainder in the second month after sale. There are no bad debts. (ii) The purchase of the medical products is the company's largest expenditure with the cost equalling 50% of sales. The medical products are purchased in the month before sale. Prior experience shows that 80% of the trade payables are paid in the month after receipt of medical products and the remaining 20% are paid in the second month after receipt. (iii) Wages are equal to 20% of the current month's sales. These wages are paid in the month incurred. (iv) Administrative expenses are budgeted to be 2,640,000 for the year and the composition is shown below. All of these expenses are incurred evenly throughout the year, except for the rent which is paid in four equal instalments in the last month of each quarter. Salaries 480,000 Promotion 660,000 Rent 240,000 Insurance 360,000 Utilities 300,000 Depreciation 600,000 (v) Corporation Tax payments are made in the first month of each quarter and are based upon the profit of the prior quarter. The tax rate is 40%. Tab's net profit for the first quarter of 2022 is projected to be 612,000. (vi) Equipment and warehouse facilities are being purchased to support the company's expanding sales. Purchases of warehouse facilities and equipment are budgeted at 28,000 for April and 324,000 for May and are paid for in the month after purchase. (vii) Tab Ltd has a cash balance of 100,000 on 31st March 2022. In the second quarter of 2022 it is estimated that there will be an interest cost of 8,000 which is payable in June 2022 on a company loan. I I You are required to: (a) Prepare a cash budget for the months of April, May and June 2022. Show also the total for the three monthly period (20 Marks). (b) Discuss in detail why cash budgeting is particularly important for a growing company such as Tab's Ltd. In your solution you should also deal with the following: Purpose of budgeting for Tab Ltd. (5 Marks) The behavioural aspects of budgeting in a company like Tab's Ltd. (15 Marks)

Answer & Explanation Solved by verified expert

See Answer