Accounting

What the Numbers Mean 9e

Demonstration Problem
Chapter 14 Exercise 3 Purchases Budget

Problem Definition
Each gallon of Old Guard, a popular after-shave lotion, requires 6 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2010 is:
Quarter I Quarter II Quarter III 10,000 gallons 18,000 gallons 11,000 gallons

Managements policy is to have on hand at the end of every quarter enough ocean scent inventory to meet 30% of next quarters production needs. At the beginning of Quarter I, 18,000 ounces of ocean scent were on hand.

Problem Requirements
a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010. b. Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarters production.

Problem Solution
Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010:

Problem Solution
Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010: Step 1:
Set up the raw material inventory / usage model and enter all known amounts.

Problem Solution
Raw material inventory / usage model:
Qtr I Beginning Inventory Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Qtr I 18,000
Calculation: 18,000 beginning inventory amount was given

Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Qtr I 18,000 Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Qtr I 18,000 ? Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Qtr I 18,000 ? Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Qtr I 18,000 ? ? Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Qtr I 18,000 ? ? Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Qtr I 18,000 ? ? (32,400)
Calculation:
30% of next quarters usage = 6 ounces * 18,000 gallons * 30%

Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I 18,000 ? ? (32,400) Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I 18,000 ? ? (32,400) 60,000
Calculation: 6 ounces * 10,000 gallons to be produced in Quarter I

Qtr II

Problem Solution
Step 1:
Set up the raw material inventory / usage model and enter all known amounts. Step 2: Working backwards (up the model): - calculate raw materials available for use - calculate purchases

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage
Calculation: Raw material available for use = Usage + Ending Inventory = 32,400 + 60,000

Qtr I 18,000 ? 92,400 (32,400) 60,000

Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage
Calculation: Purchases = Raw material available for use - Beginning Inventory = 92,400 - 18,000

Qtr I 18,000 74,400 92,400 (32,400) 60,000

Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I 18,000 74,400 92,400 (32,400) 60,000 Qtr II

Next, repeat Step 1 and Step 2 for Quarter II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I 18,000 74,400 92,400 (32,400) 60,000 Qtr II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 92,400 Calculation: (32,400) QI Ending Inventory 60,000
becomes QII Beginning Inventory

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 92,400 (32,400) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 (32,400) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 (32,400) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 ? (32,400) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 ? (32,400) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 ? (32,400) (19,800) 60,000
Calculation: 30% of next quarters usage = 6 ounces * 11,000 gallons * 30%

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 ? (32,400) (19,800) 60,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I Qtr II 18,000 32,400 74,400 ? 92,400 ? (32,400) (19,800) 60,000 108,000
Calculation: 6 ounces * 18,000 gallons to be produced in Quarter II

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage
Calculation: Raw material available for use = Usage + Ending Inventory = 108,000 + 19,800

Qtr I 18,000 74,400 92,400 (32,400) 60,000

Qtr II 32,400 ? 127,800 (19,800) 108,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage
Calculation: Purchases = Raw material available for use - Beginning Inventory = 127,800 - 32,400

Qtr I 18,000 74,400 92,400 (32,400) 60,000

Qtr II 32,400 95,400 127,800 (19,800) 108,000

Problem Solution
Raw material inventory / usage model:
Beginning Inventory Add: Purchases Raw material available for use Less: Ending inventory Usage Qtr I 18,000 74,400 92,400 (32,400) 60,000 Qtr II 32,400 95,400 127,800 (19,800) 108,000

The number of ounces of ocean scent to be purchased in each of the first two quarters of 2010

Problem Requirements
a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010.

b. Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarters production.

Problem Solution
Why does management plan for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarters production? Because inventory provides a cushion for delivery delays or production needs in excess of the production forecast.

Accounting
What the Numbers Mean 9e
You should now have a better understanding of budgeting for purchases. Remember that there is a demonstration problem for each chapter that is here for your learning benefit.

David H. Marshall Wayne W. McManus Daniel F. Viele