14.2 Operating Budget Calculations - Production and Direct Materials Flashcards
Which one of the following would cause a company’s production budget to decrease?
A. A decrease in units produced per direct labor hour
B. A decrease in required ending inventory
C. An increase in beginning direct labor inventory
D. An increase in direct labor costs per unit
B. A decrease in required ending inventory
Production budgets are based on sales in unit plus or minus desired inventory buildup or reduction.
Products to be manufactured = desired ending inventory + budgeted sales units - beginning inventory.
Therefore, a decrease in required ending inventory will cause the production budget to decrease
Simpson, Inc., is in the process of preparing its annual budget. The following beginning and ending inventory levels (in units) are planned for the year ending December 31.
Beginning Inventory
Raw material: 40,000
Work-in-process 10,000
Finished goods: 80,000
Ending inventory
Raw material: 50,000
Work-in-process: 10,000
Finished goods: 50,000
- Two units of raw material are needed to produce each unit of finished product.
If 500,000 finished units were to be manufactured for the year by Simpson, the units of raw materials that must be purchased would be
A. 990,000 units
B. 1,000,000 units
C. 1,020,000 units
D. 1,010,000 units
D. 1,010,000 units
The 500,000 finished units to be manufactured require 1,000,000 units of raw materials (2 x 500,000). In addition, the inventory of raw material is planned to increase by 10,000 units. Consequently, 1,010,000 units of raw material should be purchased.
Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month’s estimated sales. There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30.
Assume Berol Company plans to produce 600,000 units of finished product in the 3-month period ending September 30, and to have direct materials inventory on hand at the end of the 3-month period equal to 25% of the use in that period. The estimated cost of direct materials purchases for the 3-month period ending September 30 is
A. $2,200,000
B. $2,400,000
C. $2,880,000
D. $2,640,000
D. $2,640,000
Production of 600,000 units will require 2,400,000 pounds of direct materials (600,000 units × 4 lbs.). In addition, ending inventory will be 25% of the period’s usage, or 600,000 pounds (2,400,000 × 25%). Thus, 3,000,000 total pounds will be needed. However, given 800,000 pounds in inventory, purchases will be only 2,200,000 pounds. At $1.20 per pound, the cost will be $2,640,000.
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month’s sales are in the finished goods inventory. Rokat also purchases sufficient direct materials inventory to ensure that direct materials inventory is 60% of the following month’s scheduled production.
Rokat’s sales budget in units for the next quarter is as follows:
July: 2,300
August: 2,500
September: 2,100
Rokat’s ending inventories in units for June 30 are
Finished goods: 1,900
Direct materials (legs): 4,000
Assume Rokat’s required production for August and September is 1,600 and 1,800 units, respectively, and the July 31 direct materials inventory is 4,200 units. The number of table legs to be purchased in August is
A. 6,400 legs.
B. 9,400 legs.
C. 2,200 legs.
D. 6,520 legs.
D. 6,520 legs.
Some of the legs needed for August’s production are already included in the 4,200 units in direct materials. Legs needed for August are 6,400 (1,600 × 4), but there are already 4,200 legs in the July 31 direct materials inventory. Therefore, 2,200 legs should be purchased for August production. Rokat needs 4,320 legs (1,800 × 4 × 60%) for September production. Thus, the total amount of legs to be purchased is 6,520 (2,200 + 4,320).
A gift shop maintains a 35% gross profit percentage on sales and carries an ending inventory balance each month sufficient to support 30% of the next month’s expected sales. Anticipated sales for the fourth quarter are as follows:
October: $42,000
November: 58,000
December: 74,000
What amount of goods should the gift shop plan to purchase during the month of November?
A. $40,820
B. $51,220
C. $62,800
D. $52,130
A. $40,820
The gift shop’s sales and ending inventory requirements at cost can be calculated as follows:
Projected sales x cost percentage = sales at cost
October: $42,000 × 65% = $27,300
November: 58,000 × 65% = 37,700
December: 74,000 × 65% = 48,100
November’s purchase requirements can now be determined:
Needed for sales: $37,700
Add: Required ending inventory ($48,100 × 30%) = 14,430
Less: Projected beginning inventory ($37,700 × 30%) = (11,310)
Total purchases = $40,820
