Question 1
Sigma Ltd produces and sells product X. Following the latest market research, the marketing director anticipates increased demand for the product for the year 2020.
The director believes that sales will be 50,000 units in June; 56,000 in July and 70,000 in August. Thereafter, demand is expected to increase at a rate of 10% per month until November 2020. At that point, it is expected sales will remain at the November 2020 level thereafter.
Selling price and variable costs of producing each unit of X is provided in the table below. It is expected that selling price and costs will remain stable in the foreseeable future.
Product X
£ per unit
Selling Price
£180.00
Variable Costs of production
Direct Material A (£5 per kg)
£30.00
Direct Material B (£3 per kg)
£6.00
Direct labour (£15 per hour)
£60.00
Variable production overhead (£2 per direct labour hour)
£8.00
The cost accountant of the company has provided the following additional information.
Company policy is for closing inventory of finished goods to be equal to 20% of next month’s budgeted sales and for closing inventory of materials (A and B) to be equal to 25% of next month’s usage (production requirements). On May 31st, there were 10,000 units of X; 76,800 kg of material A and 25,600 kg of material B on hand.
Other costs include the fixed manufacturing overhead which is £800,000 per month including depreciation charges of £60,000. Fixed selling and administrative costs amount to 500,000 a month.
All of the company’s direct labour are on zero hour contracts and are therefore only paid for their actual work.
The company takes one month to pay for all its overheads (fixed and variable) and takes two months to pay for its purchases of materials A and B. Direct labour is paid in the month the work is undertaken.
Cash collected from sales for a month are as follows: Thirty per cent (30%) of a month’s sales revenue are received the month following the sale. Fifty per cent (50%) of sales are collected two months following the sales and the remainder, (20%), are cash sales. Sigma Ltd allows a 2% cash discount on all its cash sales and the company does not anticipate any bad debts in the foreseeable future.
Due to increased demand, the company is planning to purchase new equipment for £3 million cash in August 2020.
REQUIRED
(a)Prepare Sigma Ltd.’s Cash Budget for the month of August 2020 only. [Assume that the company will have a cash balance of £500,000 on 1st of August.] [15 marks]
(b)Discuss the importance of the cash budget to an organisation and evaluate, along with making appropriate recommendations, Sigma’s cash budget for the month of August 2020. (maximum of 600 words). [10 marks]