ABC Company’s budgeted sales for June, July, and August are 12,000, 16,000, and
ID: 2538227 • Letter: A
Question
ABC Company’s budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month’s budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Each unit that ABC Company produces uses 3 pounds of raw material. ABC requires 25% of the next month’s budgeted production as raw material inventory each month. Required: Calculate the number of pounds of raw material to be purchased in June.
Explanation / Answer
Solution: The number of pounds of raw material to be purchased in June = 41,250 Working Notes: Computation no of units produced in June & July Budgeted ending finished goods inventory for May 3,600 Beginning Inventory of finished goods in June 3,600 Ending finished goods inventory for June 4,800 [30% of sales of July 16,000units] [30%x16,000] Sales units of June 12,000 Hence, No. of units to be produced in June = Sales units + Ending finished goods units - Beginning inventory of finished goods =12,000+4,800-3,600 =13,200 units Now for July Beginning Inventory of finished goods in July 4,800 calculated above Ending finished goods inventory for July 4,200 [30% of sales of August 14,000 units] [30%x14,000] Sales units of July 16,000 No. of units to be produced in July = Sales units + Ending finished goods units - Beginning inventory of finished goods =16,000+4,200-4,800 =15,400 units Hence, Inventory required is for units to be produced in June & 25% of the July budgeted production as raw material Ending inventory Raw material to be purchased for units required = Units to be produced in June + Ending inventory of raw material required is 25% of July production - Beginning inventory of raw material is 25% of June production =13,200 units + (25% x 15,400) - (25%x13,200) =13,200 + 3,850-3,300 =13,750 units The number of pounds of raw material to be purchased in June = no of units for which raw material required x Raw material required per unit =13,750 x 3 pound =41,250 pound Notes: It is assumed that since, all computation is budgeted , raw materials beginning inventory is also there of 25% of June production, as question specify that the company requires 25% of the next month’s budgeted production as raw material inventory each month. Please feel free to ask if anything about above solution in comment section of the question.