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Chapter 22: 5SE (page 1229)

Preparing an operating budget—direct 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’s direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell’s 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’s 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

Preparing an operating budget—inventory, purchases, and cost of goods sold budget

Slate, Inc. sells tire rims. Its sales budget for the nine months ended September 30, 2018, follows:

Quarter Ended Nine-MonthTotal

March 31 June 30 September 30 Cash sales, 20% \( 28,000 \) 38,000 \( 33,000 \) 99,000

Credit sales, 80% 112,000 152,000 132,000 396,000 Total sales \( 140,000 \) 190,000 \( 165,000 \) 495,000

In the past, cost of goods sold has been 40% of total sales. The director of marketing and the financial vice president agree that each quarter’s ending inventory should not be below \(5,000 plus 10% of cost of goods sold for the following quarter. The marketing director expects sales of \)240,000 during the fourth quarter. The January 1 inventory was $38,000. Prepare an inventory, purchases, and cost of goods sold budget for each of the first three quarters of the year. Compute cost of goods sold for the entire nine-month period.

Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this “on the side” for friends and family, he does not want to charge as much as McGill’s charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill’s has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.

Requirements

1. Why would Patrick’s actions be considered fraudulent?

2. What can a company do to protect against this kind of business risk?

Connor Company began operations on January 1 and has projected the following selling and administrative expenses:

Rent Expense $ 1,000 per month, paid as incurred

Utilities Expense 500 per month, paid in month after incurred

Depreciation Expense 300 per month

Insurance Expense 100 per month, 6 months prepaid on January 1

Determine the cash payments for selling and administrative expenses for the first three months of operations.

Preparing a financial budget—schedule of cash receipts

Berry expects total sales of \(359,000 in January and \)405,000 in February. Assume that Berry’s sales are collected as follows:

80% in the month of the sale

10% in the month after the sale

6% two months after the sales

4% never collected

November sales totaled \(350,000, and December sales were \)325,000. Prepare a schedule of cash receipts from customers for January and February. Round answers to the nearest dollar.

Question: List the four budgeting objectives.
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