Question

On January 1, 2020, the Ivanhoe Company budget committee has reached agreement on the following data for the 6 months ending June 30, 2020. Sales units: First quarter 5,800; second quarter 6,600; third quarter 7,600. Ending raw materials inventory: 40% of the next quarter’s production requirements. Ending finished goods inventory: 25% of the next quarter’s expected sales units. Third-quarter production: 7,780 units. The ending raw materials and finished goods inventories at December 31, 2019, follow the same percentage relationships to production and sales that occur in 2020. 4 pounds of raw materials are required to make each unit of finished goods. Raw materials purchased are expected to cost $4 per pound.

Prepare a production budget by quarters for the 6-month period ended June 30, 2020.

Prepare a direct materials budget by quarters for the 6-month period ended June 30, 2020.

Answer 1

Production Budget For The 6-Month Period Ended June 30, 2020
	First Quarter	Second Quarter	6-Month Period
Budgeted sales units	5,800	6,600
Add: Desired ending finished goods inventory	1,650 (6,600*25%)	1,900 (7,600*25%)
Total available	7,450	8,500
Less: Beginning finished goods inventory	1,450 (5,800*25%)	1,650
Budgeted production units	6,000	6,850	12,850

2.

Direct Material Purchases Budget For The 6-Month Period Ended June 30, 2020
	First Quarter	Second Quarter	6-Month Period
Budgeted production units	6,000	6,850
Raw material required per unit (in pounds)	4	4
Total pounds needed	24,000	27,400
Add: Desired ending raw material inventory	10,960 (27,400*40%)	12,448 (7,780*4*40%)
Total requirement	34,960	39,848
Less: Beginning raw material inventory	9,600 (24,000*40%)	10,960
Budgeted raw material purchases	25,360	28,888
Cost per pound	$4	$4
Budgeted cost of raw material purchases	$101,440	$115,552	$216,992