Alvarez Company Produces Various Parts Used In Automotive
Alvarez Company Produces Various Parts Used In The Automotive Industry
Alvarez Company produces various parts used in the automotive industry. The sales budget for the first eight months of 2012 shows the following projections: Month Units January 25,000, February 27,000, March 32,000, April 28,500, May 31,400, June 34,500, July 36,700, August 35,000. Inventory on December 31 of the previous year was budgeted at 6,250 units. The desired quantity of finished-goods inventory at the end of each month in 2012 is to be equal to 25 percent of the next month’s budgeted unit sales. Each unit of finished product requires three pounds of raw material. The company wants to have 30 percent of next month’s required raw materials on hand at the end of each month.
Required A. Prepare a production budget for January through June of 2012. B. Prepare a material purchases budget for the same period, assuming that each pound of raw material costs $ 22.
Paper For Above instruction
The production budgeting process and raw material purchasing planning are essential components of effective manufacturing management. These processes ensure that the company produces the right quantity of finished goods to meet sales demand while maintaining optimal inventory levels and controlling production costs. This paper develops a detailed production budget and raw material purchases budget for Alvarez Company for the first six months of 2012, based on the provided sales projections and inventory policies.
Production Budget for January through June 2012
The production budget determines the number of units to be produced each month to meet sales needs while maintaining the desired ending inventory. Starting with the initial inventory level of 6,250 units on December 31, 2011, and considering the projected sales and inventory policies, we calculate the required production for each month.
First, the desired ending inventory for each month is 25% of the subsequent month’s forecasted sales. For example, the ending inventory for January is 25% of February’s sales:
- February sales: 27,000 units; ending inventory for January: 25% of 27,000 = 6,750 units.
- Similarly, ending inventories are calculated for subsequent months accordingly.
Producing the correct number of units each month involves adding the expected sales for the month to the desired ending inventory and subtracting the beginning inventory (which is the previous month's ending inventory). The production formulas are:
- Production = Sales for the month + Desired ending inventory – Beginning inventory
Applying these calculations yields the monthly production figures:
| Month | Sales | Desired Ending Inventory | Beginning Inventory | Production |
|---|---|---|---|---|
| January | 25,000 | 6,750 (25% of Feb sales) | 6,250 (Dec 31, 2011) | 25,000 + 6,750 – 6,250 = 25,500 units |
| February | 27,000 | 8,100 (25% of Mar sales) | 6,750 (January's ending inventory) | 27,000 + 8,100 – 6,750 = 28,350 units |
| March | 32,000 | 7,100 (25% of Apr sales) | 8,100 (February's ending inventory) | 32,000 + 8,100 – 8,100 = 32,000 units |
| April | 28,500 | 7,875 (25% of May sales) | 7,100 (March's ending inventory) | 28,500 + 7,875 – 8,100 = 28,275 units |
| May | 31,400 | 8,625 (25% of Jun sales) | 7,875 (April's ending inventory) | 31,400 + 8,625 – 7,875 = 32,150 units |
| June | 34,500 | 8,750 (25% of Jul sales) | 8,625 (May's ending inventory) | 34,500 + 8,750 – 8,625 = 34,625 units |
Thus, the production units for January to June are approximately 25,500, 28,350, 32,000, 28,275, 32,150, and 34,625 respectively.
Material Purchases Budget for January through June 2012
The raw material purchases depend on the production schedule and inventory policies. Each finished product unit requires three pounds of raw material. To calculate raw material needs, multiply the production units for each month by three.
Furthermore, since the company wants to maintain 30% of the next month’s raw material requirement as ending inventory, we must compute the raw material needed for each month, add the desired ending inventory, and subtract the beginning inventory to determine purchases.
Calculations follow these steps for each month:
- Raw materials needed for production = Production units × 3 pounds
- Desired ending raw material inventory = 30% of next month’s raw materials needed
- Beginning raw materials inventory = previous month’s ending raw materials inventory
- Purchases = Raw materials needed for production + desired ending inventory – beginning inventory
Example for January:
- Raw materials needed: 25,500 units × 3 = 76,500 pounds
- Next month’s raw material requirement (February): 28,350 units × 3 = 85,050 pounds
- Desired ending inventory for January: 30% of 85,050 = 25,515 pounds
- Beginning inventory: 0 (initial, assuming no raw materials on hand)
- Purchases: 76,500 + 25,515 – 0 = 102,015 pounds
Repeat these calculations for subsequent months, updating beginning inventories with previous month’s ending inventories, which are 30% of the next month’s raw material needs. Multiplying by the cost per pound ($22) yields the dollar amount of raw materials purchased each month.
| Month | Production Units | Raw Material Needed (pounds) | Next Month R.M. Needed | Desired Ending Inventory (30%) | Beginning Inventory | Purchases (pounds) | Purchases Cost ($) |
|---|---|---|---|---|---|---|---|
| January | 25,500 | 76,500 | 28,350 units × 3 = 85,050 | 25,515 | 0 | 102,015 | $2,244,330 |
| February | 28,350 | 85,050 | 32,000 units × 3 = 96,000 | 28,800 | 25,515 | 85,050 + 28,800 – 25,515 = 88,335 | $1,944,210 |
| March | 32,000 | 96,000 | 28,275 units × 3 = 84,825 | 25,455 | 28,800 | 96,000 + 25,455 – 28,800 = 92,655 | $2,037,210 |
| April | 28,275 | 84,825 | 32,150 units × 3 = 96,450 | 28,935 | 25,455 | 84,825 + 28,935 – 25,455 = 88,305 | $1,942,710 |
| May | 32,150 | 96,450 | 34,625 units × 3 = 103,875 | 31,163 | 28,935 | 96,450 + 31,163 – 28,935 = 98,678 | $2,169,116 |
| June | 34,625 | 103,875 | 35,000 units × 3 = 105,000 | 31,500 | 31,163 | 103,875 + 31,500 – 31,163 = 103,212 | $2,270,064 |
Summarizing, the raw material purchase quantities and costs for January through June ensure the company maintains adequate inventory levels to meet production needs while controlling inventory costs according to policy. By aligning production and procurement processes, Alvarez Company can optimize operational efficiency and cost management during this period.
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