Question

Sweet Company has the following expected sales for the next several months for its product which sells for $10 per unit:

September       $450,000

October           $500,000

November       $400,000

Sweet buys the product from wholesalers at a cost that is 70 % of the sales price. Sweet has a policy of keeping 50% of what is needed for next month’s sales in inventory. Sweet pays for 40 % of purchases in the month of purchase and the remaining 60 % in the following month. The accounts payable balance at August 31 is $200,000 and there are 20,000 units in August ending inventory.

Required:

1. Prepare a purchases budget in units for September and October.

2. Prepare a cash disbursements budget for purchases for September and October.

Answer 1

1

Sweet Company
Merchandise purchase budget
	September	October
Budgeted cost of goods sold	$450,000*70% = $315,000	$500,000*70% = $350,000
Add: Desired ending inventory	$500,000*70%*50% = $175,000	$400,000*70%*50% = $140,000
Total Needs	$                                              490,000	$                                              490,000
Less: Beginning inventory	20,000*$10 = $200,000	$500,000*70%*50% = $175,000
Required purchase	$                                              290,000	$                                              315,000

2.

Sweet Company
Schedule cash disbursements
	September	October
Cash paid for August purchase	$                                   200,000
Cash paid for September purchase	$290,000*40% = $116,000	$290,000*60% = $174,000
Cash paid for October purchase		$315,000*40% = $126,000
Total cash disbursment	$                                   316,000	$                                   300,000

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