What risk does midwest take by using approach to budgeting

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Reference no: EM13496408

1.      MidwestInc. manufactures and sells a single product.  They are in the process of preparing next quarter's budget and have provided the following data.

 

 


Finished goods inventory, July 1

2,000 units

 

Desired finished goods inventory, July 31

2,500 units

 

Desired finished goods inventory, August 31

2,400 units

 

Projected sales, July

6,000 units

 

Projected sales, August

7,500 units

 

Raw material required per unit

5 pounds

 

Estimated raw material cost

$9 per pound

 

Direct labor required per unit

2 hours

 

Estimated direct labor rate

$16 per hour

 

Factory overhead rate (based on direct labor)

$12 per hour

 

Company policy is to have enough material on hand at the end of each month to meet 30% of the following month's production needs.

a.       How many pounds of material does Midwest Inc. plan to purchase in July?

b.      What is the budgeted August 31 finished goods inventory balance (in dollars)?

a.

33,850 pounds

b.

$242,400

Workings:

For a.

Production budget for the month of July & August

July

August







Projected sales



6000

7500

Add: Desired finished goods inventory

2500

2400

Total unit requirements



8500

9900

Less; Beginning finished goods inventory

2000

2500

Production budget, in units for July


6500

7400

 

Raw materials purchase budget for July


July


Production budgeted in units, for July


6500


x Raw materials required per unit


5

pounds

Production requirement in pounds


32500


Add: Desired ending inventory




(30% x 7400 units x 5 pounds each)


11100


Total raw material requirements


43600


Less: Beginning raw materials




(30% x 6500 units x 5 pounds each)


9750


Raw materials purchases, in pounds


33850

pounds

For b.

Finished goods, in units, at August 31

 

2400units








Raw materials cost





(2400 units x 5 pounds per unit x $9 per pound)

 $       108,000


Direct labor cost






(2400 units x 2 hours per unit x $16 per hour)

 $         76,800


Factory overhead cost





(2400 units x 2 hours per unit x $12 per hour)

 $         57,600








Finished goods inventory balance, in dollars

 $       242,400


at August 31, budgeted



 


 

2.      Refer to the data from the preceding problem.  Assume the product sells for $120 per unit, and sales are 25% cash and 75% on credit.  Management expects 40% of credit sales to be collected in the month of sale, with the remaining 60% collected the following month.

Calculate the August 31 accounts receivable balance.

Senior managers at Midwest, Inc. meet each year to prepare the master budget.  When they return from their meeting, they present the budget to the other employees.  What risk does Midwest take by using this approach to budgeting?

Reference no: EM13496408

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