Question

Question # 3 — Production and Direct Materials Budgets
Walsh Company has budgeted the following unit sales for the first quarter of 2017:
Units
January 36,000
February 54,000
March 45,000

It takes two pounds of direct materials, which cost $6 per pound, to manufacture one unit of product. It is the company's policy to have a finished goods inventory on hand at the end of each month equal to 20% of next month's sales and to maintain a direct materials inventory at the end of the month equal to 30% of the next month's production needs. The inventory levels at December 31, 2016, were in accordance with company policy.

Instructions: Answer the following independent questions and show computations which support your answers.

1. What was the number of units in ending finished goods inventory at December 31, 2016?


2. Calculate the number of units that should be scheduled for production in the month of February.




3. What was the number of units in ending direct materials inventory at December 31, 2016?



4. What was the number of units and the dollar amount of direct materials purchases budgeted for the month of January?
 

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Abdul-Rahim Taysir

Answer 1

Given information

Sales units for first quarter of 2017:

January	36,000
February	54,000
March	45,000

Ending finished goods inventory = 20% of next month's sales

Ending direct materials inventory = 30% of the next month's production needs

i. Production budget for the first quarter of 2017:

	January	February	March
a. Budgeted unit sales	36,000	54,000	45,000
b. Desired Ending Finished Good Inventory	10,800 (54,000 x 20%)	9,000 (45,000 x 20%)
c. Total Needs (a + b)	46,800	63,000
d. Beginning Finished Good Inventory	7,200 (36,000 x 20%)	10,800 (54,000 x 20%)
e. Required Production in units (c - d)	39,600	52,200

ii. Statement of Raw material Purchase Budget both in quantity pounds and dollars:

	January	February
a. Required Production in units	39,600	52,200
b. Raw material required to produce one unit (pounds)	2	2
c. Production needs (pounds) (a x b)	79,200	104,400
d. Desired Ending inventory of raw material (pounds)	31,320
	(104,400 x 30%)
e. Total needs (pounds) (c + d)	110,520
f. Beginning inventory of raw material (pounds)	23,760 (79,200 x 30%)
g. Raw materials to be purchased (pounds) (e - f)	86,760
h. Cost of raw materials per pound ($)	$6
i. Cost of raw materials to be purchased ($) (g x h)	$520,560

1. Calculation of number of units in ending finished goods inventory at December 31, 2016:

Number of units in ending finished goods inventory at December 31, 2016 (See statement i above) = 7,200 units i.e. (36,000 x 20%)

2. Calculation of number of units that should be scheduled for production in the month of February:

Number of units that should be scheduled for production in the month of February = 52,200 units (See statement i above)

3. Calculation of number of units in ending direct materials inventory at December 31, 2016:

Number of units in ending direct materials inventory at December 31, 2016 = 23,760 pounds of direct material i.e. 79,200 x 30% (See statement ii above)

4. Calculation of number of units and the dollar amount of direct materials purchases budgeted for the month of January:

Number of units of direct materials purchases budgeted for the month of January = 86,760 pounds of direct material (See statement ii above).

Dollar amount of direct materials purchases budgeted for the month of January = $86,760 x $6 = $520,560 (See statement ii above).