Question

On January 1, 2017, the Hardin Company budget committee has reached agreement on the following data for the 6 months ending June 30, 2017. Sales units: First quarter 5,800; second quarter 6,700; third quarter 7,200 Ending raw materials inventory: 40% of the next quarter’s production requirements Ending finished goods inventory: 25% of the next quarter’s expected sales units Third-quarter production: 7,800 units. The ending raw materials and finished goods inventories at December 31, 2016, follow the same percentage relationships to production and sales that occur in 2017. 4 pounds of raw materials are required to make each unit of finished goods. Raw materials purchased are expected to cost $5 per pound. Prpeare Production budget and Direct Material Budget

Answer 1

Production budget :

	First quarter	Second quarter
Expected Sales units	5,800	6,700
(+) Desired ending inventory [ 25% of the next quarter's expected sales units ]	1,675 [ 6,700 * 25% ]	1,800 [ 7,200 * 25% ]
Total required units	7,475	8,500
(-) Opening inventory	( 1,450 )	( 1,675 )
Units to be produced	6,025	6,825

Note : 1] Ending inventory of one quarter becomes the opening inventory of the next quarter. So, the ending inventory of fourth quarter of year 2016 will be the opening inventory of the first quarter of year 2017. The company maintains 25% of the next quarter's expected sales units in the ending inventory. So, the ending inventory for the fourth quarter of year 2016 would have been 1,450 units [ i.e. 25% of sales units of first quarter of year 2017 = 25% * 5,800 units ]. Thus, this 1,450 units will become the opening inventory of the first quarter of year 2017. Similarly the ending inventory of first quarter of year 2017 is taken to be the opening inventory of second quarter.

Direct materials budget :

	First quarter	Second quarter
Units to be produced	6,025	6,825
(x) Raw materials required per unit ( pounds )	4	4
Raw materials required for production ( pounds )	24,100	27,300
(+) Desired ending inventory ( pounds ) [ 40% of the next quarter’s production requirements ]	10,920 [ 40% * 27,300 ]	12,480 [ Refer note 1 below ]
Total materials required ( pounds )	35,020	39,780
(-) Opening inventory ( pounds )	( 9,640 )	( 10,920 )
Raw materials to be purchased ( pounds )	25,380	28,860
Cost of raw material per pound	$5	$5
Cost of raw materials to be purchased	$126,900	$144,300

Note : 1] Ending inventory of raw materials is desired to be kept at 40% of the next quarter's production requirement. So, ending inventory of second quarter will be 40% of the third quarter's production needs. Third quarter's production needs are 31,200 pounds [ i.e. 7,800 units to be produced * 4 pounds per unit ]. So, the ending inventory for the second quarter will be 12,480 pounds [ i.e. 31,200 pounds * 40% ]

2] For the calculation of opening inventory follow the same concept as explained in the note 1 of production budget.