Question

Morganton Company makes one product and it provided the following information to help prepare the master budget:

1. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,800, 19,000, 21,000, and 22,000 units, respectively. All sales are on credit.
2. Thirty percent of credit sales are collected in the month of the sale and 70% in the following month.
3. The ending finished goods inventory equals 20% of the following month’s unit sales.
4. The ending raw materials inventory equals 10% of the following month’s raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.40 per pound.
5. Twenty five percent of raw materials purchases are paid for in the month of purchase and 75% in the following month.
6. The direct labor wage rate is $12 per hour. Each unit of finished goods requires two direct labor-hours.
7. The variable selling and administrative expense per unit sold is $2.00. The fixed selling and administrative expense per month is $69,000.

A). In July what are the total estimated cash disbursements for raw materials purchases? Assume the cost of raw material purchases in June is $140,352; and 106,000 pounds of raw materials are needed to meet production in August. Total Cash Disbursements $___________

B).  If 106,000 pounds of raw materials are needed to meet production in August, what is the estimated raw materials inventory balance at the end of July? Raw Material Inventory Balance $____________

Answer 1

Solution

Morganton Company

A). Estimated cash disbursements for raw material purchases in July:

Raw material purchases in June = $140,352

June purchases payable in July = 140,352 x 75% = $105,264

July purchases payable in July = 234,960 x 25% = $58,740

Estimated cash disbursements for raw material purchases in July = $105,264 + 58,740 = $164,004

Total cash disbursements $164,004

Computations:

Determination of the number of units to be produced in July:

Production = sales + ending inventory – beginning inventory

Sales = 19,000 units

Ending inventory = 20% of following month’s unit sales

= 20% x August unit sales = 20% x 21,000 = 4,200

Production requirement = 19,000 + 4,200 = 23,200

Less: beginning inventory –

Beginning inventory = 20% of July unit sales

= 20% x 19,000 =3,800

Number of units to be produced in July = 23,200 – 3,800 = 19,400 units

Determination of the pounds of raw materials to be purchased in July:

Production needs in July = 19,400 units

Raw materials per unit = 5 pounds

Production needs in pounds = 19,400 x 5 = 97,000 pounds

Add: ending raw materials inventory = 10% of August’ raw materials to meet production

=10% x 106,000 pounds = 10,600 pounds

Raw materials needed for production = 97,000 + 10,600 = 107,600

Less: beginning raw materials = 10% of 97,000 = 9,700

Hence, pounds of raw materials to be purchased in July = 107,600 – 9,700 = 97,900

Determination of estimated cost of raw material purchases in July:

Estimated cost of raw material purchases = cost per pound x purchase requirements

= $2.40 x 97,900 = $234,960

B). Estimated raw material inventory balance at the end of July:

Estimated raw material inventory balance at end of July = 10% of August raw material requirements in pounds

= 10% x 106,000 = 10,600 pounds

estimated raw materials inventory balance at the end of July = $2.40 x 10,600 = $25,440