1. MidwestInc. manufactures and sells a single product. They are in the process of preparing next quarter's budget and have provided the following data.
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Finished goods inventory, July 1
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2,000 units
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Desired finished goods inventory, July 31
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2,500 units
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Desired finished goods inventory, August 31
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2,400 units
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Projected sales, July
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6,000 units
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Projected sales, August
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7,500 units
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Raw material required per unit
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5 pounds
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Estimated raw material cost
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$9 per pound
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Direct labor required per unit
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2 hours
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Estimated direct labor rate
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$16 per hour
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Factory overhead rate (based on direct labor)
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$12 per hour
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Company policy is to have enough material on hand at the end of each month to meet 30% of the following month's production needs.
a. How many pounds of material does Midwest Inc. plan to purchase in July?
b. What is the budgeted August 31 finished goods inventory balance (in dollars)?
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a.
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33,850 pounds
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b.
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$242,400
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Workings:
For a.
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Production budget for the month of July & August
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July
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August
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Projected sales
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6000
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7500
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Add: Desired finished goods inventory
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2500
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2400
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Total unit requirements
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8500
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9900
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Less; Beginning finished goods inventory
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2000
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2500
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Production budget, in units for July
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6500
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7400
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Raw materials purchase budget for July
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July
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Production budgeted in units, for July
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6500
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x Raw materials required per unit
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5
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pounds
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Production requirement in pounds
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32500
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Add: Desired ending inventory
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(30% x 7400 units x 5 pounds each)
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11100
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Total raw material requirements
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43600
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Less: Beginning raw materials
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(30% x 6500 units x 5 pounds each)
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9750
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Raw materials purchases, in pounds
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33850
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pounds
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For b.
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Finished goods, in units, at August 31
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2400units
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Raw materials cost
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(2400 units x 5 pounds per unit x $9 per pound)
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$ 108,000
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Direct labor cost
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(2400 units x 2 hours per unit x $16 per hour)
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$ 76,800
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Factory overhead cost
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(2400 units x 2 hours per unit x $12 per hour)
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$ 57,600
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Finished goods inventory balance, in dollars
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$ 242,400
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at August 31, budgeted
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2. Refer to the data from the preceding problem. Assume the product sells for $120 per unit, and sales are 25% cash and 75% on credit. Management expects 40% of credit sales to be collected in the month of sale, with the remaining 60% collected the following month.
Calculate the August 31 accounts receivable balance.
Senior managers at Midwest, Inc. meet each year to prepare the master budget. When they return from their meeting, they present the budget to the other employees. What risk does Midwest take by using this approach to budgeting?