Question

Rani Lopez owner of Rani Flowers and Gifts produces gift baskets for various special occasions. Each gift basket includes fruit or assorted small gifts (e.g. a coffee mug, deck of cards, novelty cocoa mixes and scented soap) in a basket that is wrapped in colorful cellophane.

Rani has estimated the following unit sales of the standard gift basket for the rest of the year and for January of next year.

	Units
September	250
October	200
November	230
December	380
January	100

Rani likes to have 5% of the next month’s sales needs on hand at the end of each month. This requirement was met on August 31.

Two materials are needed for each gift basket:

Fruits 1 kg

Small gifts 6 items

The materials inventory policy is to have 5% of the next month’s fruit needs on hand and 30% of the next month’s production needs of small gifts. Materials inventory on September 1 met this company policy.

Required:

(a) Prepare a production budget for September, October, November and December for gift basket. (Note: Round all answers to the nearest whole unit).

(b) Prepare a direct materials purchases budget for the two types of materials used in production of gift basket for months of September, October and November. (Note: Round all answers to the nearest whole unit).

(c) Why do you think there is such a big difference in budgeted units from November to December? Why did Rani budget fewer units in January than December?

Answer 1

Part (a)

Calculation production budget
Months	September	October	November	December
Budgeted Sales	250	200	230	380
Add:Closing inventory(5% of next month sales)	(200 x 5%)	(230 x 5%)	(380 x 5%)	(100 x 5%)
	10	11.5	19	5
	260	211.5	249	385
Less:Opening inventory	12.5	10	11.5	19
Production required	247.5	201.5	237.5	366

Part (b)

Calculation of Direct material purchase budget (FRUITS)
Months	September	October	November
Production unit	247.5	201.5	237.5
Required amount of fruits(@ 1 kg per unit)	247.5	201.5	237.5
Add:Year end inventory                                               (5% of next month fruit need)	(10*1)	(11.5*1)	(19*1)
10.00	11.50	19.00
Total fruits	257.50	213.00	256.50
Less:Opening inventory	12.5	10.00	11.50
Material required to purchase (FRUITS)	245.00	203.00	245.00

Calculation of Direct material purchase budget (SMALL GIFT)
Months	September	October	November
Production unit	247.5	201.5	237.5
Required amount of small gift (@ 6 items per unit)	1485	1209	1425
Add:Year end inventory                                      (30% of next month small gift need)	(1209 x 30%)	(1425 x 30%)	((366 x6) x30%)
362.7	427.5	658.8
Total small gifts	1847.7	1636.5	2083.8
Less:Opening inventory	445.5	362.7	427.5
Material required to purchase (SMALL GIFTS)	1402.2	1273.8	1656.3

Part (c)

January is a month of fewer gift giving occation,that is why there is huge budget difference from the month of November to December

December is the last month ,and Rani has balance units in her hand from the previous year to meet the required target in january