Chapter 14, Problem 14.1ME

To determine

Concept introduction:

Budget: It is forward looking exercise which the company takes by preparing estimated revenues, costs and resources needed by company for a period. It can be prepared for single period or for multiple periods

Production Budget: The estimated production of finished goods for each period is calculated by preparing the production budget. The starting point is sales budget and requirement of opening and closing inventory is determined. The formula to calculate the production quantity is given below

  $\text{Productuon Quantity = Quantity sold + closing Finished goods Inventory - Opening Finished goods Inventory}$

To calculate:

The production units for the month of June and July

Answer to Problem 14.1ME

The units to be produced for June is 13,200 units and July is 15,400 units

Explanation of Solution

The following information is required to calculate the production units of finished goods for the each month

• The budgeted quantity of sales for June to august is given as 12,000, 16,000 and 14,000 units respectively
• The closing finished goods inventory for each month is given as 30% of next month budgeted sales quantity. The closing finished goods quantity for the month of June and July are calculated below

			June Qty	July Qty
			July sales qty	30% requirement	Quantity	August sales qty	30% requirement	Quantity
			A	B	C=A x B	D	E	F=D X E
Closing Finished goods inventory	16000	30%	4800	14000	30%	4200

• The opening finished goods inventory for June is 3,600 units, for July is 4800 units and for august is 4,200 units. The closing finished goods inventory for June will be opening finished goods inventory for July

The production quantity is calculated by using following formula

  $\text{Productuon Quantity = Quantity sold + closing Finished goods Inventory - Opening Finished goods Inventory}$

The production units to be produced for June and July are calculated as under

		June	July
Budgeted sales of finished goods inventory	A	12,000	16,000
Add :-
Closing finished goods inventory	B	4,800	4,200
Total Quantity	C= A + B	16,800	20,200
Less :-
Opening Finished goods quantity	D	3,600	4,800
Production quantity	E= C - D	13,200	15,400

The production units to be produced for June is 13,200 units and July is 15,400 units