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Chapter 22: 14SE (page 1231)

Question:Brooks Company expects to sell 8,500 units for \(175 each for a total of \)1,487,500 in January and 2,500 units for \(200 each for a total of \)500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for \(280 each. Brooks’s target ending inventory is \)20,000 plus 50% of the next month’s cost of goods sold. Prepare Brooks’s inventory, purchases, and cost of goods sold budget for January and February

Short Answer

Expert verified

Answer

Particular

January

February

Purchase

695,625

635,600

Cost of goods sold

1,041,250

350,000

Step by step solution

01

Preparation of operating budget

Brooks Company
Operating Budget

Particulars

January ($)

February ($)

Total ($)

Sale

$1,487,500

$500,000

$1,987,500

Cost of goods sold (70% of sales)

1,041,250

350,000

1,391,250

Add: Desired ending Inventory

195,000

480,600

675,600

Total Inventory

1,236,250

830,600

2,066,850

Less: Beginning Inventory

540,625

195,000

735,625

Budgeted Purchases

695,625

635,600

1,331,225

02

Computation of desired ending inventory and beginning inventory for January

DesiredendingInventoryforJanuary=Targetedending+50%ofFebruaryCOGS=20,000+350,000×50%=$195,000COGSofMarch=(UnitSold×SellingPricePerUnits)×70%=(4,700×$280)×70%=$921,200DesiredendingInventoryforFebruary=Targetedending+50%ofMarchCOGS=20,000+921,20BeginningInventory=TargetedendingInventory+50%ofJanuaryCOGS=20,000+1,041,250×50%=$540,625

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Most popular questions from this chapter

Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so employee turnover is high.

Assistant Manager/Controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel’s performance. These performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on which hotels deserve extra funds for capital improvements.

When the budget was almost complete, Dunn asked the bookkeeper to increase the amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly control capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously.

Requirements Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following questions:

1. What is the ethical issue?

2. What are the options?

3. What are the possible consequences?

4. What should you do?

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’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?

Preparing a financial budget—schedule of cash payments

Jefferson Company has budgeted purchases of merchandise inventory of \(457,500 in January and \)533,250 in February. Assume Jefferson pays for inventory purchases 70% in the month of purchase and 30% in the month after purchase. The Accounts Payable balance on December 31 is $98,275. Prepare a schedule of cash payments for purchases for January and February.

Preparing an operating budget—direct labor budget Baker Company expects to produce 2,050 units in January and 1,994 units in February. Baker budgets five direct labor hours per unit. Direct labor costs average $9 per hour. Prepare Baker’s direct labor budget for January and February.

How does the master budget for a merchandising company differ from a manufacturing company?
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