Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 20

Production and purchases budgets Osage Inc. has actual sales for June and July and forecast sales for August, September, October, and November as follows:

Actual:
June	4,150 units
July	4,350 units
Forecasted:
August	4,200 units
September	4,950 units
October	3,900 units
November	3,700 units

Required:

a. The firm’s policy is to have finished goods inventory on hand at the end of the month that is equal to 70% of the next month’s sales. It is currently estimated that there will be 3,300 units on hand at the end of July. Calculate the number of units to be produced in each of the months of August, September, and October.

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b. Each unit of finished product requires 5 pounds of raw materials. The firm’s policy is to have raw material inventory on hand at the end of each month that is equal to 80% of the next month’s estimated usage. It is currently estimated that 13,000 pounds of raw materials will be on hand at the end of July. Calculate the number of pounds of raw materials to be purchased in each of the months of August and September.

Step 1 of 7

Production Budget:

A production budget is one of the types of operation budget. It is a budget which shows the level of output to be achieved with regard to budgeted sales. It helps managers to decide about the purchase of raw materials, and arrangement of human resources to meet the production of required output.