Question

Production 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 60,000 120,000 February 70,000 140,000 March 50,000 100,000 April 58,000 116,000 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 35,000 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

Answer 1

Given:

Sales Budget:

Month	Unit Sales	Dollar Sales ($)
January	60000	120000
February	70000	140000
March	50000	100000
April	58000	116000

Ending inventory for each month = 15% of next month's sales

Opening inventory of peanut butter is 35000 jars at the beginning of January.

Production Budget:

Particulars	January	February	March
Expected Sales	60000	70000	50000
Add: Closing inventory to be maintained as per Company's policy	10500	7500	8700
	(70000 * 15%)	(50000 * 15%)	(58000 * 15%)
Less: Opening inventory	35000	10500	7500
Peanut butter to be produced	35500	67000	51200

Total Peanut butter to be produced in the quarter = 35500 + 67000 + 51200 = 153700 units

Direct Material Purchases Budget:

Given:

One unit of Peanut Butter requires two raw materials:

a. Peanuts - 24 ounces

b. Jar - 1 jar

Ending inventory for each month = 20% of next month's production needs

The policy was met as on 1st January.

Particulars	January	February
Peanut (in ounces)	Jars (in units)	Peanut (in ounces)	Jars (in units)
Raw Material required as per Production budget	852000	35500	1608000	67000
Add: Closing inventory to be maintained as per Company's policy	321600	13400	245760	10240
	(67000 * 20% *24)	(67000 * 20% *1)	(51200 * 20% *24)	(51200 * 20% * 1)
Less: Opening inventory	170400	7100	321600	13400
	(35500 * 20% *24)	(35500 * 20% *1)
Raw Materials to be purchased	1003200	41800	1532160	63840

Note: Since the sales budget is not given for the month of May, the production budget could not be prepared for the month of April and in turn the Direct Materials purchase budget could not be prepared for the month of March.