CMA Study Group

 View Only
  • 1.  Budget

    Posted 05-28-2020 10:23 AM

    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



     can i use sell unit to  plan produce by growth rate in sale then estimated direct material purchase ?



    ------------------------------
    Hend Abdel-Gafar
    Accountant
    Cairo
    Egypt
    ------------------------------


  • 2.  RE: Budget

    Posted 05-28-2020 11:12 AM
    Hello Hend,

    My thinking:
    I think the 'use in that period' wording may be tricky. You can use the sell unit to plan production then estimate material purchases, but it's a waste of time.

    From estimated sales, we determine production needs; from this minus inventory on hand plus whatever they want to have on hand, we determine purchases required.

    They want to know cost of purchases for the 3 months:
    Given:  Plan to produce 600,000 units in the 3 months.  This requires 2,400,000 pounds of material.  It also wants to have 25% of the 'use in that period'.  They already have 800,000 pounds in inventory, so I think they only 'use (produce)' 1,600,000 pounds.  25% of 1,600,000 = 400,000 pounds.

    Cost/Purchases for the 3 months:
    2,400,000 needed for planned production
    + 400,000 pounds to have in hand
    - 800,000 beginning inventory
    -----------------
    2,000,000 pounds needed to purchase
    * $1.20 each pound
    ---------------------
    $2,400,000 purchase cost during 3 month period.

    Is this the answer?

    Thank you and best regards,
    Rebecca





  • 3.  RE: Budget

    Posted 05-28-2020 11:19 AM
    Hend, I should not have written  "use (produce)"...

    I don't think my answer is correct.  But, I don't think you need to calculate the sales unit to  plan produce by growth rate in sale then estimated direct material purchase.

    Rebecca





  • 4.  RE: Budget

    Posted 05-28-2020 12:49 PM
    Hend,

    I'm sorry for all the confusion.  That 'use' in the period did confuse me because I thought it may have been linked to the sales.  So I did start the sales.  But, we are only talking about purchases needed for production.  All that matters now is just production and purchases.  We don't know what sales were made or units 'used' by the sales department.

    So the amount planned 'use' by production in that 3 month period is 600,000 units or 2,400,000 pounds of material.  They want to keep 25% of this on hand.

    For purchases, you need 2,400,000 planned + 600,000 materials wanted on hand - 800,000 beginning inventory = 2,200,000 pounds needed to be purchased * $1.20/lb = $2,640,000.

    I hope this is correct.
    Rebecca





  • 5.  RE: Budget

    Posted 05-29-2020 01:57 AM
    Hi Hend 

      600 will be produced *4 Pound + 600*25%*pound ending balance -800pound beginning balance 
    600*4+600*.25*4-800 =2200 Pound
    Cost of purchasing is 2200*1.2 = 2640$

    Thanks

    ------------------------------
    Maher Hussien
    Chief Financial Officer
    Red Sea Hurghada
    Egypt
    ------------------------------



  • 6.  RE: Budget

    Posted 05-31-2020 01:32 PM
    Hi Hend,

    You cant figure it out with sales info,bocz it is an incomplete question,  it is not mentioning exactly what is the estimated sales for October (the company has to keep 80 % of the next month's sales).
    So, don't go for sales info, better to follow the method below mentioned,

    Estimated production (600000)
    Add: Ending Finished Inventory (600000*0.25= 150000)
    Less: Beginning Finished Inventory (200000)
                                                        = 550000
    Then convert the figure calculated above into DM (4-pound per unit)
    550000 * 4 = 2200000 ( DM in pound)
    2200000 pounds is the purchase estimation

    For dollar amount -     2200000 * $ 1.2 =  $ 2640000