ABC Company’s budgeted sales for June, July, and August are 12,000, 16,000, and

Question

ABC Company’s budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month’s budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Each unit that ABC Company produces uses 3 pounds of raw material. ABC requires 25% of the next month’s budgeted production as raw material inventory each month. Required: Calculate the number of pounds of raw material to be purchased in June.

Explanation / Answer

Solution: The number of pounds of raw material to be purchased in June = 41,250 Working Notes: Computation no of units produced in June & July Budgeted ending finished goods inventory for May 3,600 Beginning Inventory of finished goods in June 3,600 Ending finished goods inventory for June 4,800 [30% of sales of July 16,000units] [30%x16,000] Sales units of June 12,000 Hence, No. of units to be produced in June = Sales units + Ending finished goods units - Beginning inventory of finished goods =12,000+4,800-3,600 =13,200 units Now for July Beginning Inventory of finished goods in July 4,800 calculated above Ending finished goods inventory for July 4,200 [30% of sales of August 14,000 units] [30%x14,000] Sales units of July 16,000 No. of units to be produced in July = Sales units + Ending finished goods units - Beginning inventory of finished goods =16,000+4,200-4,800 =15,400 units Hence, Inventory required is for units to be produced in June & 25% of the July budgeted production as raw material Ending inventory Raw material to be purchased for units required = Units to be produced in June + Ending inventory of raw material required is 25% of July production - Beginning inventory of raw material is 25% of June production =13,200 units + (25% x 15,400) - (25%x13,200) =13,200 + 3,850-3,300 =13,750 units The number of pounds of raw material to be purchased in June = no of units for which raw material required x Raw material required per unit =13,750 x 3 pound =41,250 pound Notes: It is assumed that since, all computation is budgeted , raw materials beginning inventory is also there of 25% of June production, as question specify that the company requires 25% of the next month’s budgeted production as raw material inventory each month. Please feel free to ask if anything about above solution in comment section of the question.

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