QUESTION 1 (50 MARKS)John intends to start up a business in vehicle spare parts by incorporating a company. He has a savings of $5,000 at bank. He plans to approach his bank for any necessary additional finance. He provides the following budgetary information.(a) He will purchase a car for $15,500 in the beginning of March 2020. All vehicles are expected to have a five-year useful life.(b) The budgeted sales and purchases of spare parts for the following four months will be as follows:January February March April$ $ $ $Sales 71,000 82,500 89,000 99,800Purchases 34,000 39,800 48,000 53,400(c) 50% of sales are expected to be paid for by cash. The remaining 50% sales are expected to be paid equally in the following two months.(d) 30% of the purchases are expected to be paid for in the month of purchase. 40% of the purchases are expected to be paid in the month after purchase. The remainder will be paid for two months after purchase.(e) Variable overheads are budgeted at $6,500 monthly, from January, and are expected to increase by 5% each month. Such overheads are expected to be paid in full in the month in which they occur.(f) Depreciation on existing personal assets is expected to be $100 each month and cleaning expenses are expected to be $250 per month.(g) In March 2020 John will acquire a delivery lorry for $19,000 and will pay 40% of the cost in same month. The remainder will be paid in equal instalments over the following ten months together with simple interest at 10% p.a. Interest shall be charged as from month of acquisition.(h) John will make drawings of $6,000 each month, together with an additional $3,000 in March 2020.(i) John will rent another showroom starting February 2020 at $6,000 per month.Page 3 of 5(j) He expects to pay $6,500 as wages every month.(k) He expects to pay for advertising for a total of $5,500 in March and $6,500 inApril 2020.(l) The opening bank balance in January is expected to be $25,900.You are required to:(i) Prepare a Cash Budget for the three months starting February 2020.(20 marks)(ii) Explain the purposes of preparing a budget. (5 marks)(ii) Prepare a Budgeted Income Statement for the month of March 2020.(10 marks)(iv) The actual results for the month of March 2020 are as follows:Item$Sales110,000Purchase55,000Overhead exp.6,000Cleaning expenses300Rent6,000Wages7,000Advertising6,000(a) Using the actual data in the above table, prepare a variance analysis for the month of March 2020. (5 marks)(b) Discuss some probable causes of variance in the items. (5 marks)(v) Explain how standard costing is helpful to management.