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1. MidwestInc. manufactures and sells a single product. They are in the process of preparing next quarter's budget and have provided the following data.
Finished goods inventory, July 1
2,000 units
Desired finished goods inventory, July 31
2,500 units
Desired finished goods inventory, August 31
2,400 units
Projected sales, July
6,000 units
Projected sales, August
7,500 units
Raw material required per unit
5 pounds
Estimated raw material cost
$9 per pound
Direct labor required per unit
2 hours
Estimated direct labor rate
$16 per hour
Factory overhead rate (based on direct labor)
$12 per hour
Company policy is to have enough material on hand at the end of each month to meet 30% of the following month's production needs.
a. How many pounds of material does Midwest Inc. plan to purchase in July?
b. What is the budgeted August 31 finished goods inventory balance (in dollars)?
a.
33,850 pounds
b.
$242,400
Workings:
For a.
Production budget for the month of July & August
July
August
Projected sales
6000
7500
Add: Desired finished goods inventory
2500
2400
Total unit requirements
8500
9900
Less; Beginning finished goods inventory
2000
Production budget, in units for July
6500
7400
Raw materials purchase budget for July
Production budgeted in units, for July
x Raw materials required per unit
5
pounds
Production requirement in pounds
32500
Add: Desired ending inventory
(30% x 7400 units x 5 pounds each)
11100
Total raw material requirements
43600
Less: Beginning raw materials
(30% x 6500 units x 5 pounds each)
9750
Raw materials purchases, in pounds
33850
For b.
Finished goods, in units, at August 31
2400units
Raw materials cost
(2400 units x 5 pounds per unit x $9 per pound)
$ 108,000
Direct labor cost
(2400 units x 2 hours per unit x $16 per hour)
$ 76,800
Factory overhead cost
(2400 units x 2 hours per unit x $12 per hour)
$ 57,600
Finished goods inventory balance, in dollars
$ 242,400
at August 31, budgeted
2. Refer to the data from the preceding problem. Assume the product sells for $120 per unit, and sales are 25% cash and 75% on credit. Management expects 40% of credit sales to be collected in the month of sale, with the remaining 60% collected the following month.
Calculate the August 31 accounts receivable balance.
Senior managers at Midwest, Inc. meet each year to prepare the master budget. When they return from their meeting, they present the budget to the other employees. What risk does Midwest take by using this approach to budgeting?
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