Question

A company budgeted unit sales of 204,000 units for January, 2013 and 240,000 units for February, 2013. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 61,200 units of inventory on hand on December 31, 2012, how many units should be produced in January, 2013 in order for the company to meet its goals?

Answer 1

Concepts and reason

Budgets: A budget is a written plan for a defined activity to be executed by the entity which is expressed in quantitative terms. A budget often serves as a road map to approach the expenditure and the other financing activities of a business. It directs the funds of an organization to be used in a most appropriate and planned manner to achieve the targets.

An entity prepares different types of budgets which include:

• Sales Budget

• Cash budget

• Expenditure budget

• Receivables budget

• Production budget etc.

Fundamentals

Production budget: It shows the expected production that an entity is required to make to achieve its target sales. The production budget is expressed in term of units, and includes details about the opening and the closing inventory as well. Further, a sales budget plays a vital role in preparing the production budget as the production is based on the expected sales.

A production budget helps in allocation and usage of resources in a more appropriate manner so that the target is achieved both efficiently and effectively.

Sales Budget: Sales budget is prepared to calculate the expected number of units to be sold period. It includes not only the number units but also the price at which the entity is expected makes the sales. Sales budget can be prepared for the entire year or for a period, say quarter etc. It is important for an enterprise to make the estimation related to the expected volume of sales and the selling price efficiently to have an effective control on the corresponding budgets like expenditure budget, collection budget which is also incorporates the expected sales figure.

Calculate the Ending inventory required to be maintained at the end of the month as provided below:

Thus, the desired number of units to be maintained as ending inventory is 72,000.

Calculate the number of units to be produced in the month of January as provided below:

Thus, the number of units to be produced in the month of January 2013 are 214,800 units.

Ans:

The number of units to be produced are 2,14,800.