Reference no: EM132534224

Maleficent Company Limited is preparing budget based on the information below.

1. Budget sales revenues: January February March $$

Credit sales 550000, 450000, 650000

Cash sales 650000, 55000, 55000

Total sales 615000, 505000, 705000

2. Past experience indicates that customers usually settle their balances as follows:

1. 60% of a month's credit sales are collected in the month of sale; and
2. the remaining 40% of a month's credit sales are collected in the following month.

3. All purchases are made on credit, 50% are paid in the month of purchase and 50% will be settled in the month following purchase. Budgeted inventory purchases are:

January $550000

February $460000

March $575000

4. Other budgeted cash disbursements:

(i) Purchase of equipment in February for $45,000 in cash;
(ii) Selling and administrative expenses of $28,000 per month; and
(iii) Dividends of $35,000 to be paid in March.

5. The cash balance as at 1 February 2020 was $50,000. It is the company policy to maintain the minimum cash balance at $50,000 at the end of each month. Therefore, the company has a credit arrangement with its bank to borrow at the beginning of any month at 8% annual interest, if necessary. The principal amount together with interest will be repaid when it has enough cash.

Required:

Question (a) Prepare a cash budget for February and March.

Question (b) Budgeting is an important management tool if implemented properly. Identity positive results when budgets are properly used.

Question (c) The CEO of Maleficent Company Limited considers to implement Zero-based budgeting and requires managers of all divisions to examine every cost and budget item in order to create budgets based on perceived needs for the coming period, regardless of what was done in previous years.

(i) How does Zero-based budgeting differ from traditional budgeting?

(ii) What are the possible advantages and disadvantages of adopting Zero-based budgeting approach?