
Concept explainers
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:
- Sales
budget - Cash Collection budget
- Production budget
- Raw material purchase budget
- 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:
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:
The estimated Cash disbursement for Raw material purchase for July

Explanation of Solution
The estimated Cash disbursement for Raw material purchase for July is $93,956
The calculation of estimated Cash disbursement for Raw material purchase 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 for 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,
Cash disbursement for Raw material purchase | ||
June | July | |
Estimated Cost of Raw Material Purchase | $ 88,880 | $ 105,800 |
Cash disbursement:
| ||
30% of the current month's purchase | $ 31,740 | |
70% of the last month's purchase | $ 62,216 | |
Cash disbursement for Raw material purchase | $ 93,956 |
Hence, the estimated Cash disbursement for Raw material purchase for July is $93,956.
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