Shiloh Ltd commenced business on 1 January 20X1 in the Gauteng region tomanufacture and wholesale several lines of luggage. Each luggage line consistsof various pieces and sizes. They also manufacture luggage for large retailcompanies according to client specifications. The following transactions areexpected during the first six-month period:Cost Management Acc_Chap 10.indd 301 2014/07/03 9:18 AM302Cost and Management Accounting
â—� In order to raise capital, management decided to issue 150 000 R1 ordinaryshares for cash on 1 January, as well as take a long-term loan of R50 000 at12% interest on 1 May.
â—� Sales volume was expected to be 44 units in January, 33 units in February,57 units in March, 69 units in April, and increase by 4 units per monththereafter. Each unit is expected to sell at R2 500. Cash sales were expectedto be R20 000 in January, R40 000 for each of the next three months, andR60 000 per month thereafter. Sixty percent of credit customers wereexpected to pay after one month for a cash discount of 2.5%. The remainingcustomers will pay after three months, but 10% of them are expected to bebad debts.
â—� Purchases of material are planned at R90 000 in January and R64 000 inFebruary, increasing at R8 000 per month thereafter, with two months creditallowed. The closing stock will be R60 000.
â—� Wages and salaries will cost R38 000 per month for January, February andMarch. Thereafter it will increase to R45 000 per month. Tax deductions of15% of labour cost will be paid to SARS one month after the deduction.
â—� Additional premises that cost R30 000 per annum will be rented, paidquarterly in advance.
â—� Building and equipment insurance is R25 000 for the year, payable in January.
â—� Rates are R40 000 for the year, paid semi-annually in March and September.
â—� Administration costs are R8 000 per month, paid one month in arrears.
â—� The launch advertising will cost R20 000. Selling costs of R5 000 per monthwill be incurred, thereafter decreasing to R2 000 per month in May and June.The launch advertising and selling costs are paid one month in arrears.
â—� Plant costing R100 000 will be purchased in January in the Limpopo provinceand paid for in that month, net of 15% retention which will be released inMay. This plant is to be depreciated over a ten-year lifespan with no scrapvalue. Additional premises will be purchased in June for R40 000.
â—� Overdraft interest will cost 15% per annum on the overdrawn balance at eachmonth end. There is no interest on cash surpluses.
Required:Using the above information, prepare:
(a) a cash budget for the six months from January until June.
(b) a budgeted income statement for the six months ending 30 June 20X1
(c) a budgeted balance sheet as at 30 June 20X1
(d) Shiloh Ltd presently operates a ‘top-down’ budgeting system where seniormanagers impose budgets on departmental managers. It is now consideringallowing departmental managers to participate in the setting of their ownbudgets. Explain the arguments for and against the participation of departmentalmanagers in the preparation of their budgets.(Round off all calculations to the nearest whole number.)
Requirements: