Module 9 Budget Problem Part 1 Country

Module 9 Budget Problem Part 1module 9 Budget Problemcountry Cookin

Prepare the sales, production, and direct materials budgets for the first quarter of next year for Country Cookin' Inc. Also, determine the budgeted manufacturing cost per unit and prepare the budgeted income statement for January of next year.

Paper For Above instruction

Country Cookin' Inc. is preparing its budget for the upcoming first quarter of the year, focusing on sales, production, and direct materials budgets. The company expects to sell 6,000 units in January, 8,000 units in February, and 14,000 units in March, with total sales reaching 12,000 units in April. Each cooker/smoker sells for $130 and requires 11 ounces of raw material purchased at $8.00 per ounce. The company maintains inventory policies to ensure an ending raw material stock of 10% of the subsequent month's production requirements and an ending inventory of finished goods equal to 20% of the next month’s sales.

The initial raw material inventory at the start of the year is 7,744 ounces, representing 15% of the sales forecast. The production volume for the first quarter needs to be calculated based on sales and inventory policies. The monthly sales figures directly influence the production and raw material purchase budgets.

Sales Budget

The sales budget estimates revenue based on unit sales and sale price. For January, February, and March, the sales are 6,000, 8,000, and 14,000 units respectively, at $130 per unit. The total revenue for each month is computed by multiplying units sold by unit price. Additionally, the proportion of cash versus credit sales affects cash flow planning but does not alter the sales revenue figure.

  • January: 6,000 units × $130 = $780,000
  • February: 8,000 units × $130 = $1,040,000
  • March: 14,000 units × $130 = $1,820,000

Production Budget

The production budget is aligned with sales forecasts and inventory policies. It considers the desired ending inventory of finished goods—which is 20% of the following month's sales—and beginning inventory, which is the ending inventory from the previous month. Calculations for each month are as follows:

  • January: Sales (6,000) + Desired ending inventory (2,800 units for February) – Beginning inventory (remaining from December) = Units to produce.
  • February: Sales (8,000) + Desired ending inventory (2,800 units for March) – Beginning inventory (from January's ending inventory) = Units to produce.
  • March: Sales (14,000) + Desired ending inventory (2,800 units for April) – Beginning inventory (from February) = Units to produce.

Assuming start with initial inventory, production quantities are calculated accordingly and used to determine raw materials purchases.

Direct Materials Budget

The direct materials budget calculates the ounces of raw material needed for production, accounting for desired ending inventory of raw materials (10% of next month’s production requirements). It subtracts beginning inventory to determine the purchase quantity.

  • Total ounces needed for production = Units to produce × 11 ounces.
  • Desired ending inventory of raw materials = Next month’s ounces needed × 10%.
  • Ounces to purchase = Total ounces needed + desired ending inventory – beginning inventory of raw materials.
  • Total cost of direct materials = Ounces to purchase × $8.00 per ounce.

Budgeted Manufacturing Cost per Unit

This cost includes direct materials, direct labor, and manufacturing overhead. Direct materials are calculated based on the budget. Direct labor relates to 0.25 hours per unit at $15 per hour. Manufacturing overhead includes variable and fixed components, allocated based on expected activity levels.

The total manufacturing cost per unit is derived by summing the per-unit costs of materials, labor, and overhead.

Budgeted Income Statement for January

Revenue, cost of goods sold (based on production and unit costs), gross profit, operating expenses, and net income are computed. Operating expenses include a specified allocation of variable and fixed manufacturing overhead and other expenses. Income tax at 35% is applied to operating income to determine net income.

Conclusion

This financial planning process allows Country Cookin' Inc. to prepare for operational needs, cash flow management, and profitability analysis for the first quarter. Precise calculations and assumptions are necessary for accurate budgeting, and adherence to inventory policies ensures smooth production and sales operations.

References

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