Final answer:
A purchases budget is calculated by determining the desired ending inventory, adding it to the cost of goods sold, and subtracting the beginning inventory for the month. The desired ending inventory is 30% of the next month's COGS, which is 70% of budgeted sales.
Step-by-step explanation:
The question requires preparing a purchases budget for Favata Company for the months of July through September. To do this, we must calculate the desired ending inventory and the total quantity of purchases needed for each month. The desired ending inventory is based on the following month's cost of goods sold (COGS) at a rate of 30%.
Using the provided budgeted sales, we can calculate the COGS by taking the sales amount and multiplying it by the COGS rate of 70%. For instance, July's COGS would be $51,000 × 70% = $35,700. The desired ending inventory for each month is then 30% of the next month's COGS.
We then calculate the total needed inventory by adding the desired ending inventory to the COGS. Subtract the beginning inventory from the total needed to find the budgeted purchases for the month. Below you will find the calculations for July through September:
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- July: Desired ending inventory = August COGS of $40,000 × 70% × 30% = $8,400
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- August: Desired ending inventory = September COGS of $70,000 × 70% × 30% = $14,700
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- September: Desired ending inventory = October COGS of $72,000 × 70% × 30% = $15,120
The total needed inventory for each month would be the sum of the COGS and the desired ending inventory. Finally, the budgeted purchases are obtained by deducting the beginning inventory of the month from the total needed inventory.