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Cash budget and zero budgeting revision question (NBAA, B5, NOV 2018)

Mama Kadogoo likes baking and has decided to start her own business in Goba. She has developed a delicious Low Calories Cake and has created two varieties: Vanilla Cream and Chocolate Sweet.   Mama Kadogoo hopes to commence production in January 2019 and has conducted some market research to assess the interest in, and demand for her products.  She has TZS.5,000,000 of saving to use for the business, but will require additional bank funding to get the business started. Mama Kadogoo has prepared the following information relating to her business.



Estimated sales demand:

Cake January February March April May June
Vanilla Cream 1,000 1,500 1,600 1,800 2,000 2,000
Chocolate Sweet 1,500 1,650 1,600 2,200 2,100 2,200
  • Mama Kadogoo has obtained orders from a hotel that specialises in arranging conferences and events.   She also has orders from local restaurants and coffee shops.   She estimates that 30% of her customers will pay cash immediately and has agreed to give one month’s credit to the remaining customers.
  • The Vanilla Cream Cake will have a selling price of TZS.1,800 each while the Chocolate Sweet Cake will sell for TZS.1,950 each for the first three months but she intends to increase these prices by 10% after that time.



  • The Cakes are made using the same basic ingredients but with a different topping.  Mama Kadogoo has calculated that for each variety of Cake, the basic ingredient cost is 20% of the selling price while the cost of the topping is 8% of the selling price.   In line with the selling price increase of 10% explained at (2) above, Mama Kadogoo also expects an increase in the cost of ingredients of 10% after the first three months of operations.
  • In  terms  of  paying  for  ingredients  and  toppings,  Mama  Kadogoo  has negotiated that she will get one month’s credit from the ingredient supplier but must pay cash immediately for topping purchases.
  • Some months ago, Mama Kadogoo successfully applied for a grant from a Local Enterprise Board.  She will receive TZS.5,100,000 in total, to be paid in two equal installments, January and May 2019.
  • To start production, Mama Kadogoo will need to purchase some kitchen equipment in January costing TZS.4,500,000.  The equipment is expected to last for four years and have no scrap value at the end of that time.
  • Mama Kadogoo has located suitable premise, which have been approved by the food safety authority, and which will cost TZS.1,200,000 per month to rent.  The landlord requires one month’s rent as a deposit, and this must be paid with the first month’s rent.
  • Other operating costs including power, packaging, insurance, administration expenses and depreciation of kitchen equipment are expected to be TZS.4,005,000 for the year.
  • Mama Kadogoo will employ two staff in the business and will pay wages of TZS.1,320,000 each per month.
  • Unless otherwise specified, the relevant costs are paid in the month in which they are incurred.



REQUIRED:

Prepare a Cash Budget for Mama Kadogoo’s business, on monthly basis, for the six months period commencing 1st  January 2019, clearly showing the closing cash balance at the end of each month.

(b)   Evaluate “Zero Based Budgeting” over “traditional budgeting” method.    

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