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Chapter 6: Problem 24

Material purchases budget. The McGrath Company has prepared a sales budget of 42,000 finished units for a 3 -month period. The company has an inventory of 13,000 units of finished goods on hand at December 31 and has a target finished-goods inventory of 15,000 units at the end of the succeeding quarter. It takes 3 gallons of direct materials to make one unit of finished product. The company has an inventory of 61,000 gallons of direct materials at December 31 and has a target ending inventory of 53,000 gallons at the end of the succeeding quarter. How many gallons of direct materials should McGrath Company purchase during the 3 months ending March 31?

Short Answer

Expert verified
McGrath Company should purchase \(134,000\) gallons of direct materials during the 3 months ending March 31.

Step by step solution

01

Calculate the total direct materials needed for production

To calculate the total direct materials needed for production, we will use the given sales budget of 42,000 finished units and the fact that 3 gallons of direct materials are needed for each finished unit. The total direct materials needed for production can be calculated using the formula: Total direct materials needed = (Finished units) 脳 (Gallons per finished unit)
02

Calculate the total direct materials to be accounted for

The total direct materials to be accounted for can be found by adding the beginning inventory of direct materials to the total direct materials needed for production, and then subtracting the target ending inventory of direct materials: Total direct materials to be accounted for = (Beginning inventory of direct materials) + (Total direct materials needed for production) - (Target ending inventory of direct materials)
03

Calculate the gallons of direct materials to be purchased

Using the values given in the exercise, and the results calculated in Step 1 and Step 2, we can now calculate the gallons of direct materials to be purchased: Total direct materials to be accounted for = (61,000) + (Total direct materials needed for production) - (53,000) Now let's calculate the total direct materials needed for production using the formula from Step 1: Total direct materials needed = (42,000 finished units) 脳 (3 gallons per finished unit) Total direct materials needed = 126,000 gallons Now, let's plug the total direct materials needed for production into our formula from Step 2: Total direct materials to be accounted for = (61,000) + (126,000) - (53,000) Total direct materials to be accounted for = 134,000 gallons Therefore, McGrath Company should purchase 134,000 gallons of direct materials during the 3 months ending March 31.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Sales Budget
The sales budget functions as a roadmap that forecasts the number of units a company expects to sell within a specific timeframe. For McGrath Company, this period spans three months with an anticipated sale of 42,000 finished units. The importance of a sales budget cannot be overstated as it acts as the cornerstone of several other financial plans. By identifying how many units need to be sold, businesses can better manage resources, finances, and operations effectively.

Through the sales budget, companies like McGrath assess their performance and set realistic targets for production. This also aids in understanding customer demand, allowing adjustments in production and inventory levels to avoid over or under-production.
Inventory Management
In the context of McGrath Company, effective inventory management encompasses maintaining a balance between the stock of finished goods and raw materials. The company starts with an inventory of 13,000 finished units and aims for 15,000 units by the end of the quarter. Proper inventory management ensures that they neither run out of stock nor incur excess holding costs.

Effective inventory management also involves calculating the correct amounts of direct materials, like McGrath鈥檚 tracking of their direct materials inventory from 61,000 gallons aiming for 53,000 gallons. This approach minimizes unnecessary storage costs and prevents stockouts, ultimately leading to better cash flow and financial health.
Direct Materials
Direct materials are the raw materials used directly in production. For McGrath Company, producing one unit of finished product requires 3 gallons of direct materials. They're crucial as they directly impact the cost of goods sold (COGS) and the company鈥檚 overall profitability.

Companies must precisely forecast and plan for their direct materials needs to ensure production processes run smoothly. Accurate planning, as shown in McGrath's calculated need for 126,000 gallons, helps prevent delays and reduce waste, ultimately keeping costs under control and supporting steady production.
Finished Goods
Finished goods are products that have completed the manufacturing process and are ready to be sold to customers. For McGrath Company, managing finished goods involves starting with the beginning inventory of 13,000 units and targeting 15,000 units by the quarter's end. This ensures there is enough product to meet anticipated sales without holding excessive stock.

Effective management of finished goods is critical, as it influences sales fulfillment, customer satisfaction, and financial stability. By maintaining an optimal level of inventory, McGrath Company can meet customer demand promptly while minimizing the costs associated with holding inventory, such as warehousing and potential obsolescence.

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Most popular questions from this chapter

Define rolling budget. Give an example.

Revenues and production budget. Saphire, Inc., bottles and distributes mineral water from the company's natural springs in northern Oregon. Saphire markets two products: 12-ounce disposable plastic bottles and 1 -gallon reusable plastic containers. 1\. For \(2018,\) Saphire marketing managers project monthly sales of 500,000 12-ounce bottles and 130,0001 -gallon containers. Average selling prices are estimated at \(0.30\) per 12 -ounce bottle and \(1.60\) per 1 -gallon container. Prepare a revenues budget for Saphire, Inc., for the year ending December 31,2018 2\. Saphire begins 2018 with 980,000 12-ounce bottles in inventory. The vice president of operations requests that 12 -ounce bottles ending inventory on December \(31,2018,\) be no less than 660,000 bottles. Based on sales projections as budgeted previously, what is the minimum number of 12 -ounce bottles Saphire must produce during \(2018 ?\) 3\. The VP of operations requests that ending inventory of 1 -gallon containers on December \(31,2018,\) be 300,000 units. If the production budget calls for Saphire to produce 1,200,0001 -gallon containers during \(2018,\) what is the beginning inventory of 1 -gallon containers on January \(1,2018 ?\)

Responsibility and controllability. Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair fountains), and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own tools. 1\. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materials costs in May are higher than budgeted. 2\. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget. 3\. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the diriver has been driving the van for personal use. 4\. Regency Mall, one of Prestige's fountain service customers, calls the service people only for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer 5\. Prestige's service technicians are paid an hourly wage of S22, regardless of experience or time with the company. As a result of an analysis performed last month, the service manager determined that service technicians in their first year of employment worked on average 20\% more slowly than other employees. Prestige bills customers per service call, not per hour. 6\. The cost of health insurance for service technicians has increased by 40\% this year, which caused the actual health insurance costs to greatly exceed the budgeted health insurance costs for the service technicians For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest ways to solve the problem or to improve the situation.

Comprehensive operating budget. Skulas, Inc., manufactures and sells snowboards. Skulas manufactures a single model, the Pipex. In late 2017 , Skulas's management accountant gathered the following data to prepare budgets for January 2018 : Skulas's CEO expects to sell 2,900 snowboards during January 2018 at an estimated retail price of \(650\) per board. Further, the CEO expects 2018 beginning inventory of 500 snowboards and would like to end January 2018 with 200 snowboards in stock. Variable manufacturing overhead is \( 7\) per direct manufacturing labor-hour. There are also \( 81,000\) in fixed manufacturing overhead costs budgeted for January \(2018 .\) Skulas combines both variable and fixed manufacturing overhead into a single rate based on direct manufacturing labor-hours. Variable marketing costs are allocated at the rate of \( 250\) per sales visit. The marketing plan calls for 38 sales visits during January 2018\. Finally, there are \( 35,000\) in fixed nonmanufacturing costs budgeted for January 2018 Other data include: The inventoriable unit cost for ending finished-goods inventory on December \(31,2017,\) is \( 374.80 .\) Assume Skulas uses a FIF0 inventory method for both direct materials and finished goods. Ignore work in process in your calculations. 1\. Prepare the January 2018 revenues budget (in dollars). 2\. Prepare the January 2018 production budget (in units). 3\. Prepare the direct material usage and purchases budgets for January 2018 4\. Prepare a direct manufacturing labor costs budget for January 2018 5\. Prepare a manufacturing overhead costs budget for January 2018 6\. What is the budgeted manufacturing overhead rate for January \(2018 ?\) 7\. What is the budgeted manufacturing overhead cost per output unit in January \(2018 ?\) 8\. Calculate the cost of a snowboard manufactured in January 2018 . 9\. Prepare an ending inventory budget for both direct materials and finished goods for January 2018. 10\. Prepare a cost of goods sold budget for January 2018 11\. Prepare the budgeted income statement for Skulas, Inc., for January 2018 12\. What questions might the CEO ask the management team when reviewing the budget? Should the CEO set stretch targets? Explain briefly. 13\. How does preparing the budget help Skulas's management team better manage the company?

Comprehensive problem with \(A B C\) costing. Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for the month of April is given in the following tables: Animal Gear uses a FIF0 cost-flow assumption for finished-goods inventory. Animal Gear uses an activity-based costing system and classifies overhead into three activity pools: Setup, Processing, and Inspection. Activity rates for these activities are \( 105\) per setup-hour, \( 10\) per machine-hour, and \( 15\) per inspection-hour, respectively. Other information follows: If necessary, round up to calculate number of batches. Nonmanufacturing fixed costs for March equal \( 32,000\), half of which are salaries. Salaries are expected to increase \(5 \%\) in April. 0 ther nonmanufacturing fixed costs will remain the same. The only variable nonmanufacturing cost is sales commission, equal to \(1 \%\) of sales revenue. Prepare the following for April: 1\. Revenues budget 2\. Production budget in units 3\. Direct material usage budget and direct material purchases budget 4\. Direct manufacturing labor cost budget 5\. Manufacturing overhead cost budgets for each of the three activities 6\. Budgeted unit cost of ending finished-goods inventory and ending inventaries budget 7\. cost of goods sold budget 8\. Nonmanufacturing costs budget 9\. Budgeted income statement (ignore income taxes) 10\. How does preparing the budget help Animal Gear's management team better manage the company?
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