Question

Cost of goods sold, inventory, and purchases budget (Learning Objective 4)

Scannell Readers sells eReaders. Its sales budget for the nine months ended September 30 follows:

Scannell Readers Sales Budget For the Nine Months Ended September 30
	Quarter Ended
	Mar 31	Jun 30	Sep 30	Nine-Month Total
Cash sales, 40%...................................	$ 52,000	$ 72,000	$ 62,000	$186,000
Credit sales, 60%.................................	78,000	108,000	93,000	279,000
Total sales, 100%.................................	$130,000	$180,000	$155,000	$465,000

In the past, cost of goods sold has been 60% of total sales. The director of marketing and the financial vice president agree that each quarter’s ending inventory should not be below $10,000 plus 10% of cost of goods sold for the following quarter. The marketing director expects sales of $230,000 during the fourth quarter. The January 1 inventory was $18,000.

Requirement

Prepare a cost of goods sold, inventory, and purchases budget for each of the first three quarters of the year. Compute cost of goods sold for the entire nine-month period.

Answer 1

Purchases Budget

The purchases budget represents the inventory required for the estimated production or estimated sales for a given period.

Prepare purchases budget of S Readers for nine-month period.

S Readers
Inventory, Purchases, and Cost of Goods Sold Budget
For Nine Months Ended September 30
Particulars	March 31	June 30	September 30	Nine-Month Total
Cost of goods sold	$78,000	$108,000	$93,000	$279,000
Add: Desired ending inventory	20,800	19,300	23,800	23,800
Total inventory required	98,800	127,300	116,800	302,800
Less: Beginning inventory	(18,000)	(20,800)	(19,300)	(18,000)
Amount of inventory to purchase	$80,800	$106,500	$97,500	$284,800

Working Notes:

Compute cost of goods sold for March 31.

Sales revenue = $130,000

Cost of goods sold percentage = 60%

Compute cost of goods sold for June 30.

Sales revenue = $180,000

Cost of goods sold percentage = 60%

…… (1)

Compute cost of goods sold for September 30.

Sales revenue = $155,000

Cost of goods sold percentage = 60%

…… (2)

Compute desired ending inventory for March 31.

Cost of goods sold for June 30 = $108,000 (From equation (1))

Percentage = 10%

Compute desired ending inventory for June 30.

Cost of goods sold for September 30 = $93,000 (From equation (2))

Percentage = 10%

Compute cost of goods sold for fourth quarter.

Sales revenue = $230,000

Cost of goods sold percentage = 60%

…… (3)

Compute desired ending inventory for September 30.

Cost of goods sold for fourth quarter = $138,000 (From equation (3))

Percentage = 10%