Budget Master Ltd is in the process of preparing budgets for the period October toDecember 2018. Thefollowing information has been provided to assist in the budgeting process:(1) Budgeted monthly sales revenue is as follows:GHSOctober 2018 40,000November 2018 70,000December 2018 50,000January 2019 45,000(2) Sales are 20% cash and 80% credit. Credit sales are collected over a three month period: 15%in the month of sale, 70% in the month following sale and 15% in the second month followingsale. Bad debts of 5% are anticipated on all credit sales.(3) Total sales revenue in August 2018 amounts to GHS30,000 and September 2018’s total salesrevenue amounts to GHS36,000.(4) Cost of sales is expected to amount to 60% of sales revenue each month.(5) The business maintains its closing inventory levels at 75% of the following month’s cost ofsales. Inventory at the beginning of October 2018 is expected to amount to GHS18,000.(6) 50% of inventory purchased is paid in the month of purchase. The remaining 50% is paid forin the month following purchase. As at 30 September 2018, amount owed for purchases areGHS11,700.(7) A grant of GHS20,000 is expected to be received in mid-October 2018.(8) A second hand van which cost GHS8,000 three years ago is expected to be sold in December2018 for GHS3,000. At this time the expected net book value of the van is GHS1,800.(9) Equipment costing GHS4,500 will be purchased and paid for in November 2018. Theequipment will be depreciated on a straight line basis over three years.(10) Operating expenses are paid as incurred. These have been estimated as follows:GHSOctober 2018 12,800November 2018 18,900December 2018 14,600The above figures include depreciation on existing assets of GHS2,000 per month.(11) The cash balance on 1 October 2018 is expected to amount to GHS8,000Required:i) Calculate the purchases figure for each month from October 2018 to December 2018.
Question
Budget Master Ltd is in the process of preparing budgets for the period October toDecember 2018. Thefollowing information has been provided to assist in the budgeting process:(1) Budgeted monthly sales revenue is as follows:GHSOctober 2018 40,000November 2018 70,000December 2018 50,000January 2019 45,000(2) Sales are 20% cash and 80% credit. Credit sales are collected over a three month period: 15%in the month of sale, 70% in the month following sale and 15% in the second month followingsale. Bad debts of 5% are anticipated on all credit sales.(3) Total sales revenue in August 2018 amounts to GHS30,000 and September 2018’s total salesrevenue amounts to GHS36,000.(4) Cost of sales is expected to amount to 60% of sales revenue each month.(5) The business maintains its closing inventory levels at 75% of the following month’s cost ofsales. Inventory at the beginning of October 2018 is expected to amount to GHS18,000.(6) 50% of inventory purchased is paid in the month of purchase. The remaining 50% is paid forin the month following purchase. As at 30 September 2018, amount owed for purchases areGHS11,700.(7) A grant of GHS20,000 is expected to be received in mid-October 2018.(8) A second hand van which cost GHS8,000 three years ago is expected to be sold in December2018 for GHS3,000. At this time the expected net book value of the van is GHS1,800.(9) Equipment costing GHS4,500 will be purchased and paid for in November 2018. Theequipment will be depreciated on a straight line basis over three years.(10) Operating expenses are paid as incurred. These have been estimated as follows:GHSOctober 2018 12,800November 2018 18,900December 2018 14,600The above figures include depreciation on existing assets of GHS2,000 per month.(11) The cash balance on 1 October 2018 is expected to amount to GHS8,000Required:i) Calculate the purchases figure for each month from October 2018 to December 2018.
Solution
To calculate the purchases figure for each month from October 2018 to December 2018, we need to follow these steps:
Step 1: Calculate the cost of sales for each month. The cost of sales is 60% of the sales revenue.
For October: 40,000 * 0.60 = GHS 24,000 For November: 70,000 * 0.60 = GHS 42,000 For December: 50,000 * 0.60 = GHS 30,000
Step 2: Calculate the closing inventory for each month. The closing inventory is 75% of the following month's cost of sales.
For October: November's cost of sales * 0.75 = 42,000 * 0.75 = GHS 31,500 For November: December's cost of sales * 0.75 = 30,000 * 0.75 = GHS 22,500 For December: January's cost of sales * 0.75 = 45,000 * 0.60 * 0.75 = GHS 20,250
Step 3: Calculate the purchases for each month. The formula for purchases is: Opening Inventory + Purchases - Closing Inventory = Cost of Sales. We rearrange this to find Purchases = Cost of Sales - Opening Inventory + Closing Inventory.
For October: Purchases = 24,000 - 18,000 + 31,500 = GHS 37,500 For November: Purchases = 42,000 - 31,500 + 22,500 = GHS 33,000 For December: Purchases = 30,000 - 22,500 + 20,250 = GHS 27,750
So, the purchases figure for each month from October 2018 to December 2018 are GHS 37,500, GHS 33,000, and GHS 27,750 respectively.
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Fill in the Blank QuestionFill in the blank question.The first step in preparing the master budget is planning the budget.
budgeting process.
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