Wilcox Ltd. manufactures and sells a single product for which the given budget details are available:
Selling price per unit 75
Less: Materials – 3kg at Rs.10 30
Labor – 1 hour at Rs.15 15
Contribution per unit 30
Quarter 1 Quarter 2 Quarter 3 Quarter 4
1) Budgeted sales in units 5,000 2,000 2,500 6,000
2) Opening stocks of finished goods (at start of Quarter 1) are 1000 units. Closing stocks of finished goods at the end of each quarter are budgeted at 10% of sales volume for that quarter.
3) The company operates a Just in Time (JIT) system and as a result the stock of raw materials can be supposed to be always zero.
Raw material purchases are paid for in the quarter of purchase.
Direct labor costs are paid for in the quarter of production.
4) Sales revenue is received as follows: 60% throughout the quarter of sales, 35% throughout the following quarter, with remaining 5% being bad debts.
5) Fixed overheads are Rs 40,000 per quarter. This figure comprises depreciation of Rs 10,000. Fixed overheads are paid for in the quarter in which they are incurred.
6) Machinery costing Rs100,000 is due to be installed in quarter 2 and paid for in quarter 3.
7) A tax liability of Rs75,000 and a dividend payment of Rs 40,000 are due to be paid in quarter 1.
8) Opening debtors balance is Rs 60,000 which will be paid in quarter 1.
9) The opening bank balance at the beginning of quarter one is nil. The company presently has no overdraft facilities.
a) Make a cash budget for each quarter, showing all the relevant computation.
b) The success or failure of a business based on its ability to manage cash. Therefore the cash budget is of utmost significance. Illustrate.