Question

Preparing an inventory purchases budget and schedule of cash payments

Humboldt, Inc. sells fireworks. The company's marketing director developed the following cost of goods sold budget for April May. June, and July.

April May June July
Budgeted cost of goods sold $37,500 $34,000 $30,880 $45,090

Humboldt had a beginning inventory balance of $1800 on April 1 and a beginning balance in accounts payable of $7400. The company desires to maintain an ending inventory balance equal to 10 percent of the next period's cost of goods sold. Humboldt makes all purchases on account The company pays 60 percent of accounts payable in the month of purchase and the remaining 40 percent in the month following purchase.

Required
a. Prepare an inventory purchases budget for April, May, and June.

Answer 1

The inventory purchases budget for Humboldt, Inc. for the months of April, May, and June are calculated based on the ending inventory desired and the budgeted cost of goods sold. The calculated budgets are $39,100 for April, $33,688 for May, and $32,301 for June.

Step-by-step explanation:

To prepare Humboldt, Inc.'s inventory purchases budget for April, May, and June, we follow the steps below:

1. Calculate the desired ending inventory for each month, which is 10% of the next month's budgeted cost of goods sold (COGS).
2. For April's ending inventory, use May's COGS ($34,000) to get $3,400 (10%). For May, use June's COGS ($30,880) to get $3,088 (10%), and for June, use July's COGS ($45,090) to get $4,509 (10%).
3. Add the desired ending inventory to the budgeted COGS to find the total goods needed for the month.
4. Subtract the beginning inventory for the month to find the total purchases needed. The beginning inventory of April is $1,800, while for May and June, it is the previous month's ending inventory.
5. For April: $37,500 COGS + $3,400 desired ending inventory - $1,800 beginning inventory yields purchases of $39,100.
6. For May: $34,000 COGS + $3,088 desired ending inventory - $3,400 beginning inventory (April's ending inventory) yields purchases of $33,688.
7. For June: $30,880 COGS + $4,509 desired ending inventory - $3,088 beginning inventory (May's ending inventory) yields purchases of $32,301.

These calculations give us the inventory purchases needed for Humboldt, Inc. to meet its inventory balance goals while covering the COGS for each month.