Alvarez Company produces various parts used in the automotive industry. The sale
ID: 2500982 • Letter: A
Question
Alvarez Company produces various parts used in the automotive industry. The sales budget for the first eight months of 2012 shows the following projections:
Inventory on December 31 of the previous year was budgeted at 6,250 units. The desired quantity of finished-goods inventory at the end of each month in 2012 is to be equal to 25 percent of the next month’s budgeted unit sales. Each unit of finished product requires three pounds of raw material. The company wants to have 30 percent of next month’s required raw materials on hand at the end of each month.
Required
A. Prepare a production budget for January through June of 2012.
B. Prepare a material purchases budget for the same period, assuming that each pound of raw material costs $22.
Explanation / Answer
A.
Production budget
January
February
March
April
May
June
Total
Sales in units
25,000
27,000
32,000
28,500
31,400
34,500
1,78,400
Desired ending inventory
6,750
8,000
7,125
7,850
8,625
9,175
9,175
Total needs
31,750
35,000
39,125
36,350
40,025
43,675
2,25,925
Beginning inventory
6,250
6,750
8,000
7,125
7,850
8,625
6,250
Required production
25,500
28,250
31,125
29,225
32,175
35,050
1,81,325
B.
Direct Materials Purchases Budget
Required production
25,500
28,250
31,125
29,225
32,175
35,050
1,81,325
Raw materials needed for production
76,500
84,750
93,375
87,675
96,525
1,05,150
5,43,975
Add: Ending inventory
25,425
28,013
26,303
28,958
31,545
1,63,193
1,63,193
Raw material available for production
1,01,925
1,12,763
1,19,678
1,16,633
1,28,070
2,68,343
8,47,410
Less: Beginning inventory
22,950
25,425
28,013
26,303
28,958
31,545
22,950
Raw material to purchase
78,975
87,338
91,665
90,330
99,113
2,36,798
6,84,218
Budgeted cost of raw material
$ 17,37,450
$ 19,21,425
$ 20,16,630
$ 19,87,260
$ 21,80,475
$ 52,09,545
$ 1,50,52,785
Production budget
January
February
March
April
May
June
Total
Sales in units
25,000
27,000
32,000
28,500
31,400
34,500
1,78,400
Desired ending inventory
6,750
8,000
7,125
7,850
8,625
9,175
9,175
Total needs
31,750
35,000
39,125
36,350
40,025
43,675
2,25,925
Beginning inventory
6,250
6,750
8,000
7,125
7,850
8,625
6,250
Required production
25,500
28,250
31,125
29,225
32,175
35,050
1,81,325
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