Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 21

Estimate Production and Materials Requirements

The Casings Plant of Wyoming Machines makes plastics shells for the company’s calculators. (Each calculator requires one shell.) For each of the next two years, Wyoming expects to sell 160,000 calculators. The beginning finished goods inventory of shells at the Casings Plant is 20,000 units. However, the target ending finished goods inventory for each year is 5,000 units.

Each unit (shell) requires 6 ounces of plastic. At the beginning of the year, 60,000 ounces of plastic are in inventory. Management has set a target to have plastic on hand equal to two months’ sales requirements. Sales and production take place evenly throughout the year.

Required

a. Compute the total targeted production of the finished product for the coming year.

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b. Compute the required amount of plastic to be purchased for the coming year.

Step 1 of 3

Production budget

Production budget refers to the estimation of manufacturing the units according to the sales forecast of the product. The production budget is prepared on monthly or quarterly basis. The number of units to be produced is based on sales forecast and units kept as finished stock which is maintained for meeting the unexpected increase in demand.

Raw materials Requirement Budget

Raw material requirement budget refers to estimation of requirement of raw materials for the budgeted production purposes during the year. This budget is prepared for deciding the quantity of raw materials required for manufacturing the products. This budget helps the company to estimate the quantity of raw materials to have in hand for production purposes.