Question

roduction Budget and Direct Materials Purchases Budgets

Peanut Land Inc. produces all-natural organic peanut butter. The peanut butter is sold in 12-ounce jars. The sales budget for the first four months of the year is as follows:

	Unit Sales	Dollar Sales ($)
January	60,000	114,000
February	65,000	123,500
March	70,000	133,000
April	46,000	87,400

Company policy requires that ending inventories for each month be 15% of next month's sales. At the beginning of January, the inventory of peanut butter is 38,000 jars.

Each jar of peanut butter needs two raw materials: 24 ounces of peanuts and one jar. Company policy requires that ending inventories of raw materials for each month be 20% of the next month's production needs. That policy was met on January 1.

Required:

1. Prepare a production budget for the first quarter of the year. Show the number of jars that should be produced each month as well as for the quarter in total.

Peanut Land Inc.
Production Budget
For the First Quarter of the Year
	January	February	March	Total
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units produced

Feedback

The production budget is in units. Fill in the units for sales from the amounts provided. The desired ending inventory is added to the number of units to be produced and is calculated based on future sales. Beginning inventory is subtracted to determine units to be produced. Beginning inventory is given for the first month and is carried forward from the previous month for later months.

Review the "How to Prepare a Production Budget" example in the text.

2. Prepare a direct materials purchases budget for jars for the months of January and February.

Peanut Land Inc.
Direct Materials Purchases Budget for Jars
For January and February
	January	February	Total
Production
Jar
Jars for production
Desired ending inventory
Total needs
Less: Beginning inventory
Jars purchased

Feedback

Fill in the units produced from Requirement 1.

Production in units x Materials per unit = Direct Materials Needed for Production

The desired ending inventory for materials is added to the materials to be purchased and is calculated based on future production. Note that the percentage of desired materials inventory does not match the percentage of desired completed inventory. Beginning inventory is calculated from current month production for the first month and is carried forward from the previous month for later months.

Direct Materials Needed for Production + Direct Materials in Desired Ending Inventory – Direct Materials in Beginning Inventory = Purchases

Review the "How to Prepare a Direct Materials Purchases Budget" example in the text.

Prepare a direct materials purchases budget for peanuts for the months of January and February.

Peanut Land Inc.
Direct Materials Purchases Budget for Peanuts
For January and February
	January	February	Total
Production
Ounces
Ounces for production
Desired ending inventory
Total needs
Less: Beginning inventory
Ounces purchased

Answer 1

Solution 1:

Peanut Land Inc.
Production Budget
For the First Quarter of the Year
Particulars	January	February	March	Total
Sales	60000	65000	70000	195000
Desired ending inventory (15% of next month sales)	9750	10500	6900	6900
Total needs	69750	75500	76900	201900
Less: Beginning inventory	38000	9750	10500	38000
Units produced	31750	65750	66400	163900

Solution 2:

Peanut Land Inc.
Direct Materials Purchases Budget for Jars
For January and February
Particulars	January	February	Total
Production	31750	65750	97500
Jar	1	1	1
Jars for production	31750	65750	97500
Desired ending inventory (20% of next month production needs)	13150	13280	13280
Total needs	44900	79030	110780
Less: Beginning inventory	6350	13150	6350
Jars purchased	38550	65880	104430

Peanut Land Inc.
Direct Materials Purchases Budget for Peanuts
For January and February
Particulars	January	February	Total
Production	31750	65750	97500
Ounces	24	24	24
Ounces for production	762000	1578000	2340000
Desired ending inventory (20% of next month production needs)	315600	318720	318720
Total needs	1077600	1896720	2658720
Less: Beginning inventory	152400	315600	152400
Ounces purchased	925200	1581120	2506320