Question

Fuqua Company’s sales budget projects unit sales of part 198Z of 10,400 units in January, 13,000 units in February, and 13,400 units in March. Each unit of part 198Z requires 4 pounds of materials, which cost $3 per pound. Fuqua Company desires its ending raw materials inventory to equal 40% of the next month’s production requirements, and its ending finished goods inventory to equal 20% of the next month’s expected unit sales. These goals were met at December 31, 2019.

Prepare a production budget for January and February 2020.

Prepare a direct materials budget for January 2020.

Answer 1

Answer:

1. Production budget for January and February 2020.

Fuqua Company
Production Budget
	January	February
Budgeted sales in units	10,400	13,000
Add: Required ending inventory of finished goods	2,600	2,680
Total units needed for the month	13,000	15,680
Less: Beginning inventory of finished goods	2,080	2,600
Number of units to be produced	10,920	13,080

Working note:

1. Calculation of ending inventory of finished goods:

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

January = 20% of february's sales = 13,000 * 20% = 2,600 units

February = 20% of march's sales = 13,400 * 20% = 2,680 units

2. Calculation of beginning inventory of finished goods:

The beginning inventory of a month is the ending inventory of previous month.

So, the beginning inventory of february must be the ending inventory of January = 2,600

And the beginning inventory of January must be the the ending invendory of december 2019.

(It is clearly stated in the question that the goals were met at december 31 2019)

So, the ending inventory of december = 20% of january's sales = 10,400 * 20% = 2,080 units

Therefore, Beginning inventory of january = 2,080 units

or

we can also say that the beginning inventory of a month is the 20% of sales of that month itself.

2. Direct material budget for january 2020

Fuqua Company
Direct material Budget
	January
Number of units to be produced	10,920
Direct material pounds needed for each unit	4
Total pounds required for production	43,680
Add: Required ending inventory of raw materials	20,928
Total materials needed for the month	64,608
Less: Beginning inventory of raw materials	17,472
Direct materials to be purchased	47,136
Cost per pound	$3
Total cost for purchasing direct materials	$141,408

Working note;

1. Calculation of ending inventory

Ending inventory of raw materials = 40% of next month's production requirements

Ending inventory of january = 40% of february's production requirements

February' production = 13,080 units

Direct materials required = 13,080 * 4 pounds = 52,320 pounds

So, ending inventory of January = 52,320 * 40% = 20,928 pounds

2. Beginning inventory of january = Ending inventory of december

Ending inventory of december = 40% of january's production requirements = 43,680 * 40% =17,472

(43,680 = 10,920 * 4 , calculated in the direct materials budget)

So, beginning inventory of January = 17,472

or,

Beginning inventory of a month = 40% of production requirements of that month itself

3. Total costs of direct materials to be urchased = Direct materials to be purchased * cost per pound