This questions has two parts (Q 2.1 and Q 2.2), each part has sub parts and attempts to address various aspects related to budgeting. Please read the instructions carefully and answer each part.


Q2.1: (Maximum Marks = 15)


The following data has been estimated for Hamilton Limited, who commenced the business on January 1, 2018.


  • Estimated Sales:
    • January $ 60,000
    • February $ 55, 000
    • Cash sales are estimated to be 30% of the total sales


  • Debtors are expected to pay:
    • 40% in the month of sale
    • 60% in the month after sales


  • Estimated purchases:
    • January $ 35,000
    • February $ 39,000


  • All purchases are to be on credit and are to be paid for in the month following the purchase.


  • Estimated operating expenses are:

Office salaries, January $ 10, 000, February $ 12, 500, paid in cash Depreciation of equipment 25% per year on $ 250,000


  • Other information:

The owner contributed $ 85,000 cash to the business on January 1, 2018 The owner intends to withdraw $ 3,000 per month for his private use.


The accountant of Hamilton manufacturers estimates that the firm will need a minimum cash balance of $ 15, 000 in order to maintain the liquidity.




  1. Prepare a schedule of expected cash receipts from debtors for January and February, 2018, support your answer with calculations (You must show a total column for the two months). LO 4b                                           (Maximum Marks = 2.5)
  2. Prepare a cash budget for the two months ended February 28, 2018 showing the expected cash balance at the end of the each month (you must show a total column for the two months). LO 4b                                            (Maximum Marks = 8.50)
  3. On February 28, 2018, the business instalment of $ 80, 000 will be due on the new machinery. Will Hamilton manufacturers be able to pay the instalment? Explain your answer with relevant calculations. LO 4a                       (Maximum Marks = 4.0)



Q2.2: (Maximum Marks = 15)


Sweet Limited buys purchases marshmallows for $4 and sells them for 5.5. Sales for Marshmallows (in units) are budgeted as follows: October 22,000; November 27,000; December 32,000; and Jan 30, 000. Actual sales (in units) were: August 18,000; Sept 18,000; Sweets Limited has a target of finished inventory to be 30% of the following month’s unit sales. Sales are 90% in cash and 10% in credit. Credit customers pay the month following the sale. Payment for purchases is made two months after the date of purchase. The budgeted cash balance as at 1 October 2018 is $ 17,000.


  1. Prepare a sales budget (Units and $) for the quarter ended Oct – Dec 2018 (for the months and total for the quarter)  LO 4b                                             (Maximum Marks = 2.0)
  2. Prepare a purchase budget (Units and $) for the quarter ended Oct – Dec 2018 (for the months and total for the quarter) LO 4b                                      (Maximum Marks = 4.0)
  3. Prepare a cash budget for the quarter ended Oct – Dec 2018 (for the months and total for the quarter)  LO 4b                            (Maximum Marks = 6.0)
  4. Explain the purpose and at least one limitation of variance analysis. LO 4c

(Maximum Marks = 3.0)

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