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Chapter 22: 5SE (page 1229)

Preparing an operating budget鈥攄irect materials budget

Bell expects to produce 1,800 units in January and 2,155 units in February. The company budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds. Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month鈥檚 direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell鈥檚 direct materials budget for January and February.

Short Answer

Expert verified

The budgeted cost of direct materials purchases for January and February is 17,430 and 100,320 respectively.

Step by step solution

01

Meaning of direct materials budget

The budget that forecasts the amount of materials to purchase to meet the company鈥檚 production needs is known as direct materials budget

02

Preparation of sales budget for January and February

Particulars

January

February

Budgeted units to be produced

1,800

2,155

Direct materials (pounds) per tablet

x 3

x 3

Direct materials needed for production

5,400

6,465

Plus: Desired direct materials in ending inventory (pounds)

1,293

4,860

Total direct materials needed

6,693

11,325

Less: Direct materials in beginning inventory (pounds)

(4,950)

(1,293)

Budgeted purchases of direct materials

1,743

10,032

Direct materials cost per pound

$10

$10

Budgeted cost of direct materials purchases

$17,430

$100,320

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Most popular questions from this chapter

Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year鈥檚 sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?

Preparing a financial budget鈥攃ash budget

Booth has \(12,500 in cash on hand on January 1 and has collected the following budget data:

January February

Sales \) 529,000 \( 568,000

Cash receipts from customers 443,000 502,200

Cash payments for direct materials purchases 180,624 160,284

Direct labor costs 135,010 113,348

Manufacturing overhead costs (includes

depreciation of \)900 per month) 55,058 53,922

Assume direct labor costs and manufacturing overhead costs are paid in the month incurred. Additionally, assume Booth has cash payments for selling and administrative expenses including salaries of \(40,000 per month plus commissions that are 1% of sales, all paid in the month of sale. The company requires a minimum cash balance of \)20,000. Prepare a cash budget for January and February. Round to the nearest dollar. Will Booth need to borrow cash by the end of February?

Describing master budget components

Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, 鈥淚鈥檓 not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?鈥� Answer Sarah鈥檚 question.

Budgeting types Consider the following budgets and budget types.

Cash Cost of Goods Sold

Flexible Master

Operational Sales

Static Strategic

Which budget or budget type should be used to meet the following needs?

a. Upper management is planning for the next five years.

b. A store manager wants to plan for different levels of sales.

c. The accountant wants to determine if the company will have sufficient funds to pay expenses.

d. The CEO wants to make companywide plans for the next year.

Explain the difference between strategic and operational budgets
See all solutions

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