Question

Managerial Accounting: Operating budgets 1. Abe Toys, LLC manufactures and distributes a number or products to retailers. One of these products, Playclay, requires three pounds of materials A135 in the manufacture of each unit. The company is now planning raw materials needs for the third quarter - July, August, and September. Peak sales of Playclay occur in the third quarter of each year. To keep production and shipments moving smoothly, the company has the following inventory requirements: a. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 30% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 17,000 units. b. The raw materials inventory on hand at the end of the month must be equal to one-half of the following month's production needs for raw materials. The raw materials inventory on June 30 for material A135 is budgeted to be 64,500 pounds. The cost per pound of raw material is $5.00. c. The company maintains no work in process inventories and the selling price per unit of Playclay is $39.50. A sales budget for Playclay for the last six months of the year follows: July August September October November December Budgeted Sales in Units 40,000 50.000 70.000 35,000 | 20,000 10.000 Required: a. Prepare a sales budget for Playclay for the months of July, August, and September, and for the quarter in total. b. Prepare a production budget (finished goods) for Playclay for the months of July, August, and September, and for the quarter in total. c. Prepare a direct materials budget showing the quantity of material A135 to be purchased and total direct materials purchased cost for July, August, and September and for the quarter in total.

Answer 1

Sales Budget

It depicts the amount of unit and revenue that needs to be generated

	July	August	September	Total
Budgeted sales in units	40,000	50,000	70,000	160,000
Sales price	39.50	39.50	39.50	39.50
Sales Budget	1,580,000	1,975,000	2,765,000	6,320,000

Production budget

	July	August	September	Total	October
Budgeted sales in units	40,000	50,000	70,000	160,000	35,000
Add: desired inventory level	20,000	26,000	15,500	15500	11000
Total units needed	60,000	76,000	85,500	175,500	46,000
Less: beginning inventory	17,000	20,000	26,000	17,000	15,500
Required production	43,000	56,000	59,500	158,500	30,500

In the above budget, desired inventory level has been computed as 30% of next month sales + 5000.

For example,

July = 50000 * 0.3 + 5000 = 15,000 units

The October computations are done for ease of calculations.

Raw materials budget

	July	August	September	Total	October
Required production	43,000	56,000	59,500	158500	30,500
Raw materials per unit	3	3	3	3	3
Raw materials required	129,000	168,000	178,500	475,500	91500
Add: Ending inventory	84,000	89,250	45,750	45750
Total direct materials needed	213,000	257,250	224,250	521,250
Less: beginning inventory	64,500	84,000	89,250	64,500
Raw materials purchased	148,500	173,250	135,000	456,750
Cost per raw materials	5	5	5	5
Total direct materials purchased	742,500	866,250	675,000	2,283,750

3 pounds of raw materials are required for each finished goods produced.

Ending inventory is 50% of next month raw material processed into production.

The total direct materials cost is computed by multiplying the cost with raw materials purchased.