Chapter 8, Problem 6F15

Morganton Company makes one product and it provided the following information to help prepare the master budget:

1. The budgeted selling price per unit is S70. Budgeted unit sales for June_; July; August and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit.
2. Forty percent of credit sales are collected in the month of the sale and 60% in the following month.
3. The ending finished goods inventory equals 20% of the following month’s unit sales.
4. The ending raw materials inventory equals 10% of the following month’s raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.00 per pound.
5. Thirty percent of raw materials purchases are paid for in the month of purchase and 70% in the following month.
6. The direct labor wage rate is $15 per hour. Each unit of finished goods requires two direct labor-hours.
7. The variable selling and administrative expense per unit sold is $1.80. The fixed selling and administrative expense per month is $60,000.

Required:

6. What is the estimated cost of raw materials purchases for July?

To determine

Concept Introduction:

Budgets:

Budgets are prepared to estimate the revenue, costs, receipts and payments for the business. There are several types of budgets prepared for a manufacturing concern. Few major types of budgets prepared by each manufacturing concert are as follows:

1. Sales budget
2. Cash Collection budget
3. Production budget
4. Raw material purchase budget
5. Cash disbursement budget

Production Budget:

The Production budget is prepared after preparing the sales budget to estimate the number of units of finished goods to be produced. The formula for calculation for production units is as follows:

  $\begin{array}{l}Productionunits=BudgetedUnitSales+DesiredEndingFinishedGoodsInventory\\ -BeginningFinishedGoodsInventory\end{array}$

Raw Material Purchase Budget:

The Raw Material Purchase Budget is prepared after preparing the production budget to estimate the amount of Raw materials to be purchased. The formula for calculation for Raw material purchase is as follows:

  $\begin{array}{l}RawMaterialPurchase\left(Pounds\right)=Rawmaterialproductionneed+DesiredEndingRawmaterialInventory\\ -BeginningRawmaterialsInventory\end{array}$

  $CostofRawMaterialpurchase=Rawmaterialpurchase\left(pounds\right)\times Rawmaterialcostperpound$

The Cost of Raw Material Purchases for July

Explanation of Solution

The Cost of Raw Material Purchases for July is $105,800

The calculation of Cost of Raw Material Purchased for July is as follows:

Production Budget
	June	July	August	September
Budgeted Unit Sales (A)	8,400	10,000	12,000	13,000
Add: Desired Ending Finished Goods Inventory (20% of next month's sales)	2000	2400	2600
Less: Beginning Finished Goods Inventory		-2000	-2400
Production Units		10,400	12,200

Working notes:

1. The Desired Ending Finished Goods Inventory (20% of next month's sales) are calculated as follows:

June: 20% of July Sales = 20% of 10,000 units = 2,000 units

July: 20% of August Sales = 20% of 12,000 units = 2,400 units

August: 20% of September Sales = 20% of 13,000 units = 2,600 units

2. Beginning Finished Goods Inventory fir each month shall be equal to the previous month’s Ending Finished Goods Inventory.

Raw Material Purchase Budget
	June	July	August
Production units (A)		10,400	12,200
Pound of Raw Material required for each unit of finished goods (B)		5	5
Total Raw material production need (Pounds) (C) = A*B =		52,000	61,000
Add: Desired Ending Raw material Inventory (10% of next raw material production need)	5200	6100
Less: Beginning Raw materials Inventory		-5200
Raw Material Purchase (Pounds)		52,900

Working notes:

1. The Desired Ending Raw material Inventory (10% of next raw material production need) is calculated as follows:

June: 10% of July raw material production need = 10% of 42,000 pounds = 5,200 units

July: 10% of August raw material production need = 10% of 61,000 pounds = 6,100 units

2. Beginning Raw materials Inventory for each month shall be equal to the previous month’s Ending Raw materials Inventory.

Hence, the Raw material purchase for July is 52,900 Pounds. The raw material cost per pound is given $2.

Hence,

  $CostofRawMaterialpurchase=Rawmaterialpurchase\left(pounds\right)\times Rawmaterialcostperpound$

  $CostofRawMaterialPurchasesforJuly=52,900pounds\times \$2$

  $CostofRawMaterialPurchasesforJuly=\$105,800$