Chapter 9, Problem 38P

1.

To determine

Prepare the production budget for the three products of E Chemical Company for 20x2.

Explanation of Solution

Production Budget: The production budget refers to that budget which forecasts the production for the future accounting period. The budgeted production for any financial period is planned by combining the forecasted unit of sales and the finished goods inventory and deducting the beginning goods inventory.

Prepare the production budget for the three products of E Chemical Company for 20x2:

Particulars	Product Y	Product D	Product N
Sales for 20x2	60,000	40,000	25,000
Add: Inventory, 12/31/x2	5,200	2,800	2,400
Total required	65,200	42,800	27,400
Less: Inventory, 12/31/x1	(4,800)	(3,200	( 2,000)
Required production in 20x2	60,400	39,600	25,400

Table (1)

Working note 1:

Calculate the inventory in 21/31/20x2:

For Product Y:

$\begin{array}{c}\text{Inventory in 21/31/20x2 for Product Y =}\left(\begin{array}{l}\text{ Sales in 20x3}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(65,000\times .08\right)\\ =5,200\end{array}$

For Product D:

$\begin{array}{c}\text{Inventory in 21/31/20x2 for Product D =}\left(\begin{array}{l}\text{ Sales in 20x3}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(35,000\times .08\right)\\ =2,800\end{array}$

For Product N:

$\begin{array}{c}\text{Inventory in 21/31/20x2 for Product N =}\left(\begin{array}{l}\text{ Sales in 20x3}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(30,000\times .08\right)\\ =2,400\end{array}$

Working note 2:

Calculate the inventory in 21/31/20x1:

For Product Y:

$\begin{array}{c}\text{Inventory in 21/31/20x1 for Product Y =}\left(\begin{array}{l}\text{ Sales in 20x2}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(60,000\times .08\right)\\ =4,800\end{array}$

For Product D:

$\begin{array}{c}\text{Inventory in 21/31/20x1 for Product D =}\left(\begin{array}{l}\text{ Sales in 20x2}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(40,000\times .08\right)\\ =3,200\end{array}$

For Product N:

$\begin{array}{c}\text{Inventory in 21/31/20x1 for Product N =}\left(\begin{array}{l}\text{ Sales in 20x2}\times \\ \text{Projected sales percentage}\end{array}\right)\\ =\left(25,000\times .08\right)\\ =2,000\end{array}$

2.

To determine

Calculate the E Chemical Company conversion cost budget for 20x2.

Explanation of Solution

Budget: Budget is a statement prepared by the management for a specific tenure in future, to accomplish the goal of management in that particular period of time. Budget is basically expressed in the financial terms.

Calculate the E Chemical Company conversion cost budget for 20x2:

Step 1: Calculate the conversion hours required for Product Y.

$\begin{array}{c}\begin{array}{l}\text{Conversion hours required}\\ \text{for Product Y}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Required production in 20x2}\times \\ \text{Conversion requirements in hour per gallon}\end{array}\right)\\ =\left(60,400\times .07\right)\\ =4,228\end{array}$

Step 2: Calculate the conversion hours required for Product D.

$\begin{array}{c}\begin{array}{l}\text{Conversion hours required}\\ \text{for Product D}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Required production in 20x2}\times \\ \text{Conversion requirements in hour per gallon}\end{array}\right)\\ =\left(39,600\times .10\right)\\ =3,960\end{array}$

Step 3: Calculate the conversion hours required for Product N.

$\begin{array}{c}\begin{array}{l}\text{Conversion hours required}\\ \text{for Product N}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Required production in 20x2}\times \\ \text{Conversion requirements in hour per gallon}\end{array}\right)\\ =\left(25,400\times .16\right)\\ =4,064\end{array}$

Step 4: Calculate the total conversion hours required.

$\begin{array}{c}\text{Total conversion hours required =}\left(\begin{array}{l}\text{ Conversion hours required for Product Y}\\ \text{+Conversion hours required for Product D }\\ \text{+Conversion hours required for Product N}\end{array}\right)\\ =\left(4,228+3,960+4,064\right)\\ =12,252\end{array}$

Step 5: Calculate the conversion cost budget for 20x2.

$\begin{array}{c}\text{Conversion cost budget for 20x2 = }\left(\begin{array}{l}\text{Total conversion hours required×}\\ \text{Conversion cost per hour}\end{array}\right)\\ =\left(12,252\times \$20\right)\\ =\$245,040\end{array}$

Conclusion

Therefore, the conversion cost budget for 20x2 is $245,040.

3.

To determine

Prepare the company’s raw material purchases budget for 20x2.

Explanation of Solution

Prepare the company’s raw material purchases budget for 20x2:

Particulars	Amount ($)
Quantity of Islin required for production in 20x2	100,820
Add: Required inventory, 12/31/x2	10,082
Subtotal	110,902
Less: Inventory, 1/1/x2	10,000
Required purchases (gallons)	100,902
Purchases budget	$504,510

Table (1)

Working note 1:

Calculate the quantity of Islin required for production in 20x2:

$\begin{array}{c}\begin{array}{l}\text{Quantity of Islin required}\\ \text{for production in 20x2}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\begin{array}{l}\text{ Required production}\\ \text{ for Product Y}\times \text{1}\end{array}\right)+\\ \left(\begin{array}{l}\text{ Required production}\\ \text{ for Product D}\times .7\end{array}\right)+\\ \left(\begin{array}{l}\text{ Required production}\\ \text{ for Product N}\times .5\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(60,400\times 1\right)+\left(39,600\times .7\right)\\ +\left(25,400\times .5\right)\end{array}\right]\\ =\left(60,400+27,720+12,700\right)\\ =100,820\end{array}$

Working note 2:

Calculate the required inventory on 12/31/20x2:

$\begin{array}{c}\text{Required inventory on 12/31/20x2 =}\left(\begin{array}{l}\text{Total quantity of islin required }\\ \text{for production}\times \text{10\%}\end{array}\right)\\ =100,820\times \text{10\%}\\ =10,082\end{array}$

Working note 2:

Calculate the inventory on 1/1/20x2:

$\begin{array}{c}\text{Inventory on 1/1/20x2 =}\left(\begin{array}{l}\text{Usage of Islin }\\ \times \text{10\%}\end{array}\right)\\ =100,000\times \text{10\%}\\ =10,000\end{array}$

Conclusion

Therefore, the company’s raw material purchases budget for 20x2 is $504,510.

4.

To determine

Conclude whether the management can use Philin raw material or Islin raw material for the 20x2 production.

Explanation of Solution

Calculate whether the management can use Philin raw material or Islin raw material for the 20x2 production:

20x2 production requirements:	Amount ($)
Philin raw material	604,920
Islin raw material	504,100
Increase in cost of raw material (A)	$100,820
Change in conversion cost from substituting Philin for Islin:
Philin raw material	$220,536
Islin raw material	245,040
Decrease in conversion cost (B)	$(24,504)
Net increase in production cost (C = A-B)	$76,316

Table (2)

Working note 1:

Calculate the production requirement in 20x2 for Philin raw material:

$\begin{array}{c}\begin{array}{l}\text{Production requirement in }\\ \text{20x2 for Philin raw material}\end{array}\}=\left(\begin{array}{l}\text{Quantity of Islin required for }\\ \text{production in 20x2}\times \text{Unit price}\times \text{1}\text{.2}\end{array}\right)\\ =100,820\times \$5\times \text{1}\text{.2}\\ =604,920\end{array}$

Working note 2:

Calculate the production requirement in 20x2 for Islin raw material:

$\begin{array}{c}\begin{array}{l}\text{Production requirement in }\\ \text{20x2 for Islin raw material}\end{array}\}=\left(\begin{array}{l}\text{Quantity of Islin required for }\\ \text{production in 20x2}\times \text{Unit price}\end{array}\right)\\ =100,820\times \$5\\ =504,100\end{array}$

Working note 3:

Calculate the conversion cost for Philin raw material:

$\begin{array}{c}\text{Conversion cost for Philin raw material}=\left(\begin{array}{l}\text{Total conversion hours required}\\ \times \text{Conversion cost per hout}\times \text{.9}\end{array}\right)\\ =12,252\times \$20\times \text{.9}\\ =220,536\end{array}$

Working note 4:

Calculate the conversion cost for Islin raw material:

$\begin{array}{c}\text{Conversion cost for Islin raw material}=\left(\begin{array}{l}\text{Total conversion hours required}\\ \times \text{Conversion cost per hout}\end{array}\right)\\ =12,252\times \$20\\ =245,040\end{array}$

Conclusion

The company can use Islin raw material because the cost of using Philin raw material is more than the cost of Islin ($76,316).

Hence, the company should use Islin raw material for the 20x2 production.