Question

Morganton Company makes one product and it provided the following information to help prepare the master budget for its first four months of operations:

a.	The budgeted selling price per unit is $60. Budgeted unit sales for June, July, August, and September are 8,000, 11,000, 13,000, and 14,000 units, respectively. All sales are on credit.
b.	Thirty percent of credit sales are collected in the month of the sale and 70% in the following month.
c.	The ending finished goods inventory equals 25% of the following month’s unit sales.
d.	The ending raw materials inventory equals 10% of the following month’s raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.20 per pound.
e.	Twenty percent of raw materials purchases are paid for in the month of purchase and 80% in the following month.
f.	The direct labor wage rate is $12 per hour. Each unit of finished goods requires two direct labor-hours.
g.	The variable selling and administrative expense per unit sold is $1.20. The fixed selling and administrative expense per month is $61,000.

1)     If 66,250 pounds of raw materials are needed to meet production in August, how many pounds of raw materials should be purchased in July?

a.     

2)     What is the estimated cost of raw materials purchases for July?

a.     

3)     If the cost of raw material purchases in June is $99,275, what are the estimated cash disbursements for raw materials purchases in July?

a.     

4)     What is the estimated accounts payable balance at the end of July?

a.     

Answer 1

Solution:

Part 1--

Working:

Production Budget in Units
	June	July	Aug	Sept
Sales Units	8000	11000	13000	14000
Plus: Desired Finished Goods Ending Inventory (25% of next months' sales unit)	2750	3250	3500
Total Needs	10750	14250	16500
Less: Beginning Inventory	2000	2750	3250
Production Budget in Units		11500
Raw materials purchases in July
Units to be produced		11500
Required Raw material per unit in pounds		5
Total requirement for production		57500
Plus: Ending Inventory (66250*10%)		6625
Total Needs		64125
Less: Beginning Inventory (57500*10%)		5750
Required Purchased of raw material		58375

Pounds of Raw materials should be purchased in July = 58,375 Pounds

Part 2 –

Estimated Cost of Raw materials purchases in July = 58,375 Pounds * $2.20 = $128,425

Part 3 –

Cash Disbursements for July

Cash payment for June purchase in July = $99,275*80% = $79,420

Cash payment for July purchases in July = $128,425*20% = $25,685

Total Cash Disbursements in July = 79,420 + 25,685 = $105,105

4)

Estimated Accounts Payable at the end of July = Total Purchases 128,425 – Collected in July 25,685 = $102,740

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