Question

1. The following are the sales forecast of Avril Furniture Company for the upcoming fiscal year:

Year 2					Year 3
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Quarter 1
Budgeted unit sales	10,000	16,000	15,000	23,000	30,000

Past experience has shown that the ending inventory for each quarter should be equal to 10% of the next quarter’s sales in units. The company expect to start the first quarter with 4,000 units.

Two pounds of material A are required for each unit produced. The company has a policy of maintaining a stock of material A on hand at the end of each quarter equal to 25% of the next quarter's production needs for material A. Fourth quarter ending of materials is estimated as 8,000 pounds and a total of 12,000 pounds of material A are on hand to start the year. The cost of material A is $3 per pound.

Required:

1. Prepare a production budget showing the number of units to be produced each quarter and for the year in total
2. Prepare Avril’s Direct Material Budget and calculate direct materials dollar amount of purchases by quarter and for the year in total

Answer 1

Question A

Avril Furniture Company

Production Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year Total
Sales (in Units)	10,000	16,000	15,000	23,000	64,000
Add: Ending Inventory in Units	1,600	1,500	2,300	3,000	3,000
Total Inventory Required	11,600	17,500	17,300	26,000	67,000
Less: Beginning Inventory in Units	4,000	1,600	1,500	2,300	4,000
Units to be Produced	7,600	15,900	15,800	23,700	63,000

Calculation of Ending Inventory in Units

For Quarter 1 = 10% of Quarter 2 Sales

Quarter 1 = 10% * 16,000 = 1,600 Units

For Quarter 2 = 10% of Quarter 3 Sales

Quarter 2 = 10% * 15,000 = 1,500 Units

For Quarter 3 = 10% of Quarter 4 Sales

Quarter 3 = 10% * 23,000 = 2,300 Units

For Quarter 4 = 10% of Quarter 1 Sales of Year 3

Quarter 4 = 10% * 30,000 = 3,000 Units

Ending Inventory for Year 2 = 3,000 Units (Quarter 4 Ending Inventory)

Beginning Inventory

For Quarter 1 = 4,000 Units Given

For Quarter 2 = Ending Inventory of Quarter 1

For Quarter 3 = Ending Inventory of Quarter 2

For Quarter 4 = Ending Inventory of Quarter 3

Beginning of Year 2 Inventory = 4,000 Units Given

Question B

Avril Furniture Company

Material Purchases Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year Total
Units to be produced	7,600	15,900	15,800	23,700	63,000
* Direct Materials Requirement per Unit	2	2	2	2	2
Total Direct Materials requirement for Production	15,200	31,800	31,600	47,400	126,000
Add: Ending Inventory of Direct Materials	7,950	7,900	11,850	8,000	8,000
Total Inventory of Raw Materials Required	23,150	39,700	43,450	55,400	134,000
Less: Beginning Inventory of Direct Materials	12,000	7,950	7,900	11,850	12,000
Direct Materials to be Purchased	11,150	31,750	35,550	43,550	122,000

Direct Materials to be Purchased = Total Direct Materials Required for Production + Ending Inventory of Direct Materials - Beginning Inventory of Direct Materials

Calculation of Ending Inventory

Total Direct Materials Required for Production in Next Month means Material Requirement in Next Month

Particulars	Quarter 1	Quarter 2	Quarter 3
Total Direct Materials Required for Production in Next Month	31,800	31,600	47,400
* 25% of Next Month Production Requirement	25%	25%	25%
Ending inventory Unit of Direct Materials	7,950	7,900	11,850

For Quarter 4 = 8,000 Units Given

For Year End = 8,000 Units Given

Beginning Inventory

For Quarter 1 = 12,000 Units Given

For Quarter 2 = Ending Inventory of Quarter 1

For Quarter 3 = Ending Inventory of Quarter 2

For Quarter 4 = Ending Inventory of Quarter 3

Beginning of Year 2 Inventory = 12,000 Units Given

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year Total
Direct Materials Purchases in Pounds	11,150	31,750	35,550	43,550	122,000
* Direct Materials Cost per Pound	3	3	3	3	3
Total Cost of Direct Materials Purchases	33,450	95,250	106,650	130,650	366,000