Reference no: EM13764557

Question

Toggel Limited is in the business of sale and distribution of computer software. The company collates the following data to prepare its cash budget for the 6 months ended 30 September 2014.

• Sales for the 6 months are expected to rise by 3% month-on-month. The sales expected for 30 September 2014 is $2 million.
• The bank balance on 1 April 2014 is expected to be $50,000.
• Out of the 80% of sales that are on credit, 3% of debtors is expected not to pay up while 80% will pay up one month after sale and the remaining will pay two months after sale (assume nil sales before 1 April 2014).
• Research and developments costs are estimated at $550,000 per month while depreciation expense on its equipment is expected to be $250,000 per month.
• Staff costs is divided into permanent and temporary staff. The permanent staff wages averages $280,000 per month while temporary staffs are employed only from April to June 2014 to cope with the seasonal increases in sales. Temporary staff are paid 2% of sales each month.
• The company expects to replace its computers in the month of August 2014 and this is expected to cost $1,000,000.
• Rental of its business premise is prepaid in January each year at $60,000 annually.

Required:

(a) Prepare the cash budget for the period 1 April 2014 to 30 September 2014 for Toggel Limited.

(b) Evaluate the benefits and problems associated with the participative style of setting the budget.