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Pargo Company is preparing its master budget for 2017. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales. Sales for the year are expected to total 2,000,000 units. Quarterly sales are 22%, 26%, 27%, and 25%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $47 per unit beginning in the fourth quarter. Sales in the first quarter of 2018 are expected to be 15% higher than the budgeted sales for the first quarter of 2017.

Production. Management desires to maintain the ending finished goods inventories at 25% of the next quarter’s budgeted sales volume.

Direct materials. Each unit requires 2 pounds of raw materials at a cost of $11 per pound. Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2018 are 498,000 pounds.

Prepare the sales, production, and direct materials budgets by quarters for 2017.

Answer 1

Solution

Pargo Company

1. Sales Budget

Pargo Company
Sales Budget
For the year ended Dec 31, 2017
	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Expected unit sales	440,000	520,000	540,000	500,000
Unit Selling Price	$40	$40	$40	$47
Total Sales	$17,600,000	$20,800,000	$21,600,000	$23,500,000

Computation of unit sales for each quarter is as follows,
		Quarter
	1	2	3	4
unit sales proportion	22%	26%	27%	25%
Total sales = 2,000,000
unit sales	440,000	520,000	540,000	500,000

2. Production budget –

Production Budget
forecasted for the year 2017
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
expected sales in units	440,000	520,000	540,000	500,000	$2,000,000
add: ending inventory	130,000	135,000	125,000	143,750
desired units	570,000	655,000	665,000	626,500
Less: beginning units	110,000	130,000	135,000	125,000
Estimated production in units	460,000	525,000	530,000	501,500	2,016,500

Computations:

production units = expected unit sales + estimated ending finished goods - beginning finished goods units

Quarter 1 = 440,000 + (25% 520,000) - (25% 440,000) = 460,000

Quarter 2 = 520,000 + (25% 540,000) - (25% 520,000) = 525,000

Quarter 3 = 540,000 + (25% 500,000) - (25% 540,000) = 530,000

Quarter 4 = 500,000 + (25% x (440,000 + 15% 440,000)) - 25% x 500,000 = 501,500

Direct materials budget:

	Direct Materials Budget
	forecasted for the year 2017
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
units to be produced	460,000	525,000	530,000	501,500	2,016,500
pounds needed per unit	2 pounds	2 pounds	2 pounds	2 pounds
materials needed for production lbs	920,000	1,050,000	1,060,000	1,003,000
Desired ending direct materials	105,000	106,000	100,300	49,800
direct materials needed for production	1,025,000	1,156,000	1,160,300	1,052,800
less: beginning materials lbs	92,000	105,000	106,000	100,300
direct materials purchases	933,000	1,051,000	1,054,300	952,500	3,990,800
cost per pound	$11	$11	$11	$11
direct material purchases	$10,263,000	$11,561,000	$11,597,300	$10,477,500	$43,898,800

Note; direct material purchases = materials needed + desired ending materials – beginning materials

Computations for quarter 4 –

Desired ending direct materials = 10% x 498,000 = 49,800