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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

Budgeted income statement. \((\mathrm{CMA}, \text { adapted) } \mathrm{Smart}\) Video Company is a manufacturer of videoconferencing products. Maintaining the videoconferencing equipment is an important area of customer satisfaction. A recent downturn in the computer industry has caused the videoconferencing equipment segment to suffer, leading to a decline in Smart Video's financial performance. The following income statement shows results for 2017 : Smart Video's management team is preparing the 2018 budget and is studying the following information: 1\. Selling prices of equipment are expected to increase by \(10 \%\) as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged from 2017 2\. Equipment sales in units are expected to increase by 6\%, with a corresponding 6 \% growth in units of maintenance contracts 3\. cost of each unit sold is expected to increase by \(5 \%\) to pay for the necessary technology and quality improvements. 4\. Marketing costs are expected to increase by S290,000, but admininstration costs are expected to remain at 2017 levels 5\. Distribution costs vary in proportion to the number of units of equipment sold 6\. Two maintenance technicians are to be hired at a total cost of \(\$ 160,000\), which covers wages and related travel costs. The objective is to improve customer service and shorten response time 7\. There is no beginning or ending inventory of equipment. 1\. Prepare a budgeted income statement for the year ending December 31,2018 2\. How well does the budget align with Smart Video's strategy? 3\. How does preparing the budget help Smart Video's management team better manage the company?

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.

Revenues, production, and purchases budgets. The Yucatan Co. in Mexico has a division that manufactures bicycles. Its budgeted sales for Model \(\mathrm{XG}\) in 2018 are 95,000 units. Yucatan's target ending inventory is 7,000 units, and its beginning inventory is 11,000 units. The company's budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle. Yucatan buys all its wheels from an outside supplier. No defective wheels are accepted. Yucatan's needs for extra wheels for replacement parts are ordered by a separate division of the company. The company's target ending inventory is 14,000 wheels, and its beginning inventory is 16,000 wheels. The budgeted purchase price is 400 pesos per wheel. 1\. Compute the budgeted revenues in pesos. 2\. Compute the number of bicycles that Yucatan should produce. 3\. Compute the budgeted purchases of wheels in units and in pesos. 4\. What actions can Yucatan's managers take to reduce budgeted purchasing costs of wheels assuming the same budgeted sales for Model XG?

"The sales forecast is the cornerstone for budgeting." Why?

Refer to the information in Problem \(6-44\) All purchases made in a given month are paid for in the following month, and direct material purchases make up all of the accounts payable balance and are reflected in the accounts payable balances at the beginning and the end of the year. Sales are made to customers with terms net 45 days. Fifty percent of a month's sales are collected in the month of the sale, \(25 \%\) are collected in the month following the sale, and \(25 \%\) are collected two months after the sale and are reflected in the accounts receivables balances at the beginning and the end of the year. Direct manufacturing labor, variable manufacturing overhead and variable marketing costs are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, \(60 \%\) of fixed marketing costs, and \(100 \%\) of fixed distribution costs are depreciation expenses. The remaining fixed manufacturing overhead and marketing costs are paid as they are incurred. Selected balances for December \(31,2017,\) follow:Hazlett has budgeted to purchase equipment costing \( 145,000\) for cash during 2018 . Hazlett desires a minimum cash balance of \( 25,000\). The company has a line of credit from which it may borrow in increments of \( 1,000\) at an interest rate of \(12 \%\) per year. By special arrangement, with the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in 2019 1\. Prepare a cash budget for 2018 . If Hazlett must borrow cash to meet its desired ending cash balance, show the amount that must be borrowed. 2\. Does the cash budget for 2018 give Hazlett's managers all of the information necessary to manage cash in \(2018 ?\) How might that be improved? 3\. What insight does the cash budget give to Hazlett's managers that the budgeted income statement does not?
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