Month Units January 25000 May 31400 February 270
Month Units Month Units January 25000 May 31400 February 27000 June
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
To effectively operate the manufacturing process in 2012, it is essential to develop detailed budgets that align production with anticipated sales demand and raw material requirements. The budgeting process involves two key components: the production budget and the raw materials purchase budget. This paper systematically constructs these budgets for the period from January to June 2012 based on the given data and assumptions.
Part A: Production Budget
The primary purpose of the production budget is to determine the number of units to be produced each month, considering beginning inventory, sales forecasts, and ending inventory targets. The key data points include budgeted sales units for each month, beginning inventory (at the end of the previous year), and the desired ending inventory for each month.
Initial inventory on December 31 of the previous year was 6,250 units. The only information for the upcoming months is the sales forecast, which are as follows:
- January: 25,000 units
- February: 27,000 units
- March: 32,000 units
- April: 28,500 units
- May: 31,400 units
- June: 34,500 units
The ending inventory for each month is targeted at 25 percent of the next month’s sales. For example, ending inventory in January should be 25% of February sales, which is 25% of 27,000 units, amounting to 6,750 units.
Calculations for ending inventories:
- January: 25% of February sales (27,000) = 6,750 units
- February: 25% of March sales (32,000) = 8,000 units
- March: 25% of April sales (28,500) = 7,125 units
- April: 25% of May sales (31,400) = 7,850 units
- May: 25% of June sales (34,500) = 8,625 units
- June: 25% of July sales; since July sales are not forecasted, we may assume the same as June for simplicity, e.g., 34,500 units. So, ending inventory for June: 25% of 34,500 = 8,625 units.
The production units for each month are calculated using the formula:
Production units = Projected sales for the month + Desired ending inventory – Beginning inventory
Beginning inventory for January is the ending inventory of December (initial inventory): 6,250 units.
| Month | Sales | Desired Ending Inventory | Beginning Inventory | Production |
|---|---|---|---|---|
| January | 25,000 | 6,750 | 6,250 | 25,000 + 6,750 – 6,250 = 25,500 |
| February | 27,000 | 8,000 | 6,750 | 27,000 + 8,000 – 6,750 = 28,250 |
| March | 32,000 | 7,125 | 8,000 | 32,000 + 7,125 – 8,000 = 31,125 |
| April | 28,500 | 7,850 | 7,125 | 28,500 + 7,850 – 7,125 = 29,225 |
| May | 31,400 | 8,625 | 7,850 | 31,400 + 8,625 – 7,850 = 32,175 |
| June | 34,500 | 8,625 | 8,625 | 34,500 + 8,625 – 8,625 = 34,500 |
Thus, the monthly production units are as follows:
- January: 25,500 units
- February: 28,250 units
- March: 31,125 units
- April: 29,225 units
- May: 32,175 units
- June: 34,500 units
Part B: Raw Material Purchases Budget
Each finished good unit requires three pounds of raw material, and raw materials cost $22 per pound. The raw material needed to produce the units calculated above is determined by multiplying the units to be produced by three pounds per unit.
The company desires to keep raw materials on hand at 30% of the next month’s raw material requirement. The raw material requirement for each month is calculated by:
Raw material needed = Units to be produced × 3 pounds
- January: 25,500 units × 3 = 76,500 pounds
- February: 28,250 units × 3 = 84,750 pounds
- March: 31,125 units × 3 = 93,375 pounds
- April: 29,225 units × 3 = 87,675 pounds
- May: 32,175 units × 3 = 96,525 pounds
- June: 34,500 units × 3 = 103,500 pounds
Ending raw materials inventory for each month is 30% of the subsequent month’s raw material requirement, and beginning raw materials inventory is the ending inventory of the previous month.
Calculations of raw material purchases for each month are as follows:
| Month | Raw Material Needed | Desired Ending Inventory (30%) of next month's raw materials | Beginning Inventory | Raw Materials to Purchase |
|---|---|---|---|---|
| January | 76,500 | 84,750 × 30% = 25,425 | Calculated upon previous month, which is December's ending inventory (assumed 30% of January's raw materials), approximately 22,950 pounds. | Raw material requirement for January + desired ending inventory – beginning inventory = 76,500 + 25,425 – 22,950 = 78,975 pounds |
| February | 84,750 | 93,375 × 30% = 28,013 | 84,750 × 30% = 25,425 (from previous month’s ending inventory) | 84,750 + 28,013 – 25,425 = 87,338 pounds |
| March | 93,375 | 87,675 × 30% = 26,303 | 93,375 × 30% = 28,013 | 93,375 + 26,303 – 28,013 = 91,665 pounds |
| April | 87,675 | 96,525 × 30% = 28,958 | 87,675 × 30% = 26,303 | 87,675 + 28,958 – 26,303 = 90,330 pounds |
| May | 96,525 | 103,500 × 30% = 31,050 | 96,525 × 30% = 28,958 | 96,525 + 31,050 – 28,958 = 98,617 pounds |
| June | 103,500 | — | 103,500 × 30% = 31,050 | 103,500 + 0 – 31,050 = 72,450 pounds |
Finally, calculating the cost of raw materials to be purchased:
- January: 78,975 pounds × $22 = $1,737,450
- February: 87,338 pounds × $22 = $1,921,436
- March: 91,665 pounds × $22 = $2,015,630
- April: 90,330 pounds × $22 = $1,987,260
- May: 98,617 pounds × $22 = $2,169,754
- June: 72,450 pounds × $22 = $1,593,900
Conclusion
In summary, the production budget indicates the monthly units to produce based on sales forecasts and inventory policies. The raw materials purchase budget translates these production needs into dollar amounts, considering inventory policies and raw material costs. These budgets are vital for effective manufacturing operations, ensuring sufficient inventory levels to meet sales demand while controlling costs. Proper implementation of these budgets will help the company maintain efficient production schedules and cost management strategies, ultimately supporting its financial performance in 2012.
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