2. The Amplifying Manufacturing Co Ltd issued £300,000 of share capital for cash on 1 January 2004, the date of its incorporation. In the following two weeks it raised an additional £50,000 by way of a loan from its local bank and spent £200,000 on machinery. The machinery is expected to last 10 years. The company rents a factory at a cost of £10,000 per month, paid on the last day of each month. Additional fixed costs (excluding depreciation) of £10,000 are paid monthly.

During its first six months of trading the company expects to sell the following numbers of amplifying widgets: January, 1000; February, 3000; March, 5000; April, 7000; May, 9000; and June, 12,000. Of these sales 10% each month will be cash sales; the remainder are on credit, with debtors paying 40% in the month following the sale and 60% in the month following that. The selling price of each amplifying widget is £12.

The company will produce the following number of widgets each month: January, 4000; February, 5000; March, 7000; April, 9000; May, 12,000; June, 15,000. Materials cost £3 per widget and are purchased in the month of production on one month’s credit. Labour costs at £3 per widget are paid in the month of production, as are other variable overhead costs of £1 per widget.

1. Prepare monthly budgets for production, cost of materials and direct labour for the first six months of trading.

2. Prepare a monthly cash budget for the Amplifying Manufacturing Co Ltd for its first six months of trading. Show clearly the closing cash balance each month and the total cash flows over the period.