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Question

Note: I need a step by step answer to the question with an explanation of your answers:

White Corporation’s budget calls for the following sales for next year: Quarter 1 90,000 Quarter 3 68,000 Quarter 2 76,000 Quarter 4 96,000 Each unit of the product requires 3 pounds of direct materials. The company’s policy is to begin each quarter with an inventory of product equal to 5% of that quarter’s estimated sales requirements and an inventory of direct materials equal to 20% of that quarter’s estimated direct materials requirements of production. Required Determine the production and materials purchased budgets for the second quarter.

Explanation / Answer

For the second quarter, following are the required data:

For clarification for the same, kindly go through the working notes

Working Notes:

Table Showing Calculation of Production and Direct Material Budgets

Footnotes:

1. Opening balance of Finished Goods = 5% of Sales estimated for the quarter

2. Closing Balance of Finished Goods = Opening Balance calculated for next quarter

3. Production = Sales Estimate + Opening balance of Finished Goods + Closing Balance of Finished Goods

Note: the correct formula should be Production = Sales Estimate - Opening balance of Finished Goods + Closing Balance of Finished Goods, but since the Opening Balance for finished goods has been presented as negative, we had to add it here.

4. Direct Material Required = Production X Direct Material used per unit [Given as 3 pounds]

5. Opening Balance of Direct Material = 20% of Direct Material required for the quarter

6. Closing Balance of Direct Material = Opening Balance calculated for next quarter

7. Direct Materials Purchased = Direct Material Required + Opening Balance of Direct Material + Closing Balance of Direct Material

Note: the correct formula should be Production = Sales Estimate - Opening balance of Direct Material + Closing Balance of Direct Material. but since the Opening balance for Direct Material has been presented as negative, we had to add it here.

* The Closing Balance for both, Finished Goods and Direct Material, in Quarter 4 has been assumed to be 0 since we have no way to calculate the same.

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Sales Estimate 90000 76000 68000 96000 Opening Balance of Finished Goods1 (4500) (3800) (3400) (4800) Closing Balance of Finished Goods2 3800 3400 4800 0* Production3 89300 75600 69400 91200 Direct Material Required4 267900 226800 208200 273600 Opening Balance of Direct Material5 (53580) (45360) (41640) (54720) Closing Balance of Direct Material6 45360 41640 54720 0* Direct Materials Purchased7 259680 223080 221280 218880

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