Question

Oak Creek Company is preparing its master budget for 2020. Relevant data pertaining to its sales, production, and direct materials budget are as follows.

Sales: Sales for the year are expected to total 1 million units. Quarterly sales are 20%, 25%, 25% and 30% respectively. The price is expected to be at $40 per unit for the first three quarters and $45 per unit beginning in the fourth quarter. Sales in the first quarter of 2021 are expected to be at 10% higher than the budgeted sales for the first quarter of 2020.
Production: Management desires to maintain the ending finishing goods inventories at 20% of the next quarter’s budgeted sales volume.
Direct materials: Each unit requires 2kg of raw materials at a cost of $10 per kilogram, Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirement for the first quarter of 2020 are 500,000kg.
Prepare the sales, production, and direct materials budgets by quarters for 2020.

Answer 1

Sales Budget:

Q1:
Sales = 1,000,000 x 20% = 200,000 units
Revenue = 200,000 x $40 = $8,000,000

Q2:
Sales = 1,000,000 x 25% = 250,000 units
Revenue = 250,000 x $40 = $10,000,000

Q3:
Sales = 1,000,000 x 25% = 250,000 units
Revenue = 250,000 x $40 = $10,000,000

Q4:
Sales = 1,000,000 x 30% = 300,000 units
Revenue = (250,000 x $40) + (50,000 x $45) = $10,750,000

Total Revenue = $38,750,000

Production Budget:

Q1:
Production = 200,000 / (1 - 0.2) = 250,000 units
Raw Materials Required = 250,000 x 2 kg = 500,000 kg

Q2:
Production = 250,000 / (1 - 0.2) = 312,500 units
Raw Materials Required = 312,500 x 2 kg = 625,000 kg

Q3:
Production = 250,000 / (1 - 0.2) = 312,500 units
Raw Materials Required = 312,500 x 2 kg = 625,000 kg

Q4:
Production = 300,000 / (1 - 0.2) = 375,000 units
Raw Materials Required = 375,000 x 2 kg = 750,000 kg

Raw Materials Budget:

Q1:
Raw Materials Required = 500,000 kg
Add: Desired ending inventory = 10% x 625,000 kg = 62,500 kg
Total Raw Materials Required = 562,500 kg
Less: Beginning inventory = 10% x 500,000 kg = 50,000 kg
Raw Materials to be Purchased = 512,500 kg x $10/kg = $5,125,000

Q2:
Raw Materials Required = 625,000 kg
Add: Desired ending inventory = 10% x 625,000 kg = 62,500 kg
Total Raw Materials Required = 687,500 kg
Less: Beginning inventory = 10% x 562,500 kg = 56,250 kg
Raw Materials to be Purchased = 631,250 kg x $10/kg = $6,312,500

Q3:
Raw Materials Required = 625,000 kg
Add: Desired ending inventory = 10% x 625,000 kg = 62,500 kg
Total Raw Materials Required = 687,500 kg
Less: Beginning inventory = 10% x 687,500 kg = 68,750 kg
Raw Materials to be Purchased = 618,750 kg x $10/kg = $6,187,500

Q4:
Raw Materials Required = 750,000 kg
Add: Desired ending inventory = 10% x 750,000 kg = 75,000 kg
Total Raw Materials Required = 825,000 kg
Less: Beginning inventory = 10% x 687,500 kg = 68,750 kg
Raw Materials to be Purchased = 756,250 kg x $10/kg = $7,562,500

Therefore, the sales, production, and direct materials budgets by quarters for 2020 are as follows:

Sales Budget:
Q1: $8,000,000
Q2: $10,000,000
Q3: $10,000,000
Q4: $10,750,000

Production Budget:
Q1: 250,000 units
Q2: 312,500 units
Q3: 312,500 units
Q4: 375,000 units

Raw Materials Budget:
Q1: $5,125,000
Q2: $6,312,500
Q3: $6,187,500
Q4: $7,562,500