Question

A sales budget is given below for one of the products manufactured by the OMI Co.:

January 25,000 units
February 40,000 units
March 65,000 units
April 45,000 units
May 35,000 units
June 30,000 units

The inventory of finished goods at the end of each month must equal 20% of the next month's sales. However, on December 31, the finished goods inventory totaled only 4,000 units. Each unit of product requires three kilograms of specialized material. Since the production of this specialized material by OMI's suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year.
Required:
Prepare a budget showing the quantity of material to be purchased each month for January, February, and March, and in total for the quarter.

Answer 1

Purchase Budget per Month

January February March

Materials Required 3kg per unit 87,000 135,000 183,000

Add Budgeted Closing Stock 40,500 54,900 35,100

Total Purchases needed 127,500 189,900 218,100

Less Budgeted Opening Stock 0 (40,500) (54,900)

Budgeted Purchases 127,500 149,400 163,200

Total Purchases for the Quarter = 440,100

Step-by-step explanation:

First determine Production Budget per Month

January February March

Budgeted Sales 25,000 40,000 65,000

Add Budgeted Closing Stock 8,000 13,000 9,000

Total Production Needed 33,000 53,000 74,000

Less Budgeted Opening Stock (4,000) (8,000) (13,000)

Budgeted Production 29,000 45,000 61,000

Next, Purchase Budget per Month

January February March

Budgeted Production 29,000 45,000 61,000

Materials Required 3kg per unit 87,000 135,000 183,000

Add Budgeted Closing Stock 40,500 54,900 35,100

Total Purchases needed 127,500 189,900 218,100

Less Budgeted Opening Stock 0 (40,500) (54,900)

Budgeted Purchases 127,500 149,400 163,200

Total Purchases for the Quarter = 127,500+149,400+163,200 = 440,100

Answer 2

`\left[\begin{array}{ccccc}&$January&$February&$March&$Total\\$sales&25,000&40,000&65,000&130,000\\$Desired ending&8,000&13,000&9,000&9,000\\$Total Needs&33,000&53,000&74,000&139,000\\$beginning&4,000&8,000&13,000&-4,000\\$Production Requirement&29,000&45,000&61,000&135,000\\\end{array}\right]`

Step-by-step explanation:

The desired eaning will be calcualte based on next month sales:

40,000 x 20%

65,000 x 20%

45,000 x 20%

The beginning inventory will be the ending inventory of the pprevious months

The total production requirement will be

sales + desired ending - expected beginning inventory