Question

The Timbrick Company produces and sells a single product. The production of this product requires 15 liters of direct material for each unit produced. Timbrick has an inventory policy which sets a target ending inventory of finished goods equal to 15% of next months expected unit sales. The target ending inventory for direct materials is 30% of the materials needed for production for next month. The budgeted cost of direct materials is $0.40 per liter. Normally, Timbrick pays the suppliers for 30% of a month’s purchases in the month of the purchase and they pay the remainder (70%) the next month.

On 1 January 20×3, Timbrick produced a budget for the three-month period (January, February, March). An incomplete version of that budget is shown below. (Missing values show “-“)

	January	February	March	1st Quarter
PRODUCTION BUDGET
Budgeted unit sales	23,000	24,000	36,000	83,000
Target ending finished goods inventory	3,600	-	-	-
Total requirements (finished goods)	26,600	29,400	40,800	-
Beginning finished goods inventory
Units to be produced	22,750	-	-	83,950
DIRECT MATERIALS PHYSICAL UNITS BUDGET
Materials required per unit (liters/unit)	15	15	15	15
Materials to be used in production	341,250	-	-	1,259,250
Target ending materials inventory	116,100	159,300	135,900	-
Total requirements (materials)	457,350	-	-	-
Beginning materials inventory	-	-	-	-
Materials to be purchased	353,775	430,200	-	1,291,575
COST BUDGET
Material cost per liter ($/liter)	0.40	0.40	0.40	0.40
Total cost of purchases	$141,510	-	-	$516,630
Cash paid to suppliers	$135,693	-	$181,368	-

You do NOT need to fill in all the missing values in the schedule above. You need to answer the following questions. Each question is 3 marks.

Required: Please compute the follows.

1. Beginning finished goods inventory for January, 20×3.

2. Total requirements (finished goods) for the 1^st Quarter

3. Budgeted unit sales for April, 20×3.

4.Units to be produced for February, 20×3.

5. Estimate the total cost of purchases for December, 20×2.

Answer 1

Requirement 1:

Beginning finished goods inventory for January, 20×3 = Ending finished goods inventory for December, 20×2

= January months expected units sales x 15%

= 23,000 x 15%

= 3,450

Thus,

Beginning finished goods inventory for January, 20×3 = 3,450 units.

Requirement 2:

	January	February	March	1st Quarter
Total requirements (finished goods)	26,600	29,400	40,800	96,800

Thus,

Total requirements (finished goods) for the 1^st Quarter is 96,800 units

Requirement 3:

Target ending finished good inventory:

	March
Total requirements (finished goods)	40,800
Budgeted unit sales	-36,000
Target ending finished good inventory	4,800

Budgeted units sales for April, 20x3:

Budgeted units sales for April, 20x3 = March month's Ending inventory ÷ 15%

= 4,800 ÷ 15%

= 32,000 units

Thus,

Budgeted unit sales for April, 20×3 is 32,000 units.

Requirement 4:

	February
Total requirements (finished goods)	26,600
(Less):Beginning finished goods inventory [January's ending]	-3,600
Units to be produced	23,000

Requirement 5:

'Materials to be used in production for Dec 20x2 = January month's target ending materials inventory ÷ 30%

= 116,100 ÷ 30%

= 387,000 units

Estimate the total cost of purchases for December, 20×2.:

Materials to be used in production	387,000
Add: Target ending materials inventory [341,250 x 30%]	102,375
Total requirements (materials)	489,375
Less: Beginning materials inventory [387,000 x 30%]	-116100
Materials to be purchased	373,275
x Material cost per liter ($/liter)	$0.40
= Total cost of purchases	$149,310