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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:.
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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 10,000 gallons Quarter II 18,000 gallons Quarter III 11,000 gallons • Management’s policy is to have on hand at the end of every quarter enough ocean scent inventory to meet 30% of next quarter’s production needs. At the beginning of Quarter I, 18,000 ounces of ocean scent were on hand.
Problem Requirements • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010. • Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s 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 Qtr II Beginning Inventory
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Calculation: 18,000 beginning inventory amount was given
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ?
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ?
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Calculation: 30% of next quarter’s usage = 6 ounces * 18,000 gallons * 30%
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Usage
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Usage 60,000 Calculation: 6 ounces * 10,000 gallons to be produced in Quarter I
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: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: Raw material available for use = Usage + Ending Inventory = 32,400 + 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 92,400 - 18,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Next, repeat Step 1 and Step 2 for Quarter II
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: QI Ending Inventory becomes QII Beginning Inventory
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400? Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use92,400 Less: Ending inventory (32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory(32,400) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400)(19,800) Usage 60,000 Calculation: 30% of next quarter’s usage = 6 ounces * 11,000 gallons * 30%
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400)(19,800) Usage 60,000
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400) (19,800) Usage 60,000 108,000 Calculation: 6 ounces * 18,000 gallons to be produced in Quarter II
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 Calculation: Raw material available for use = Usage + Ending Inventory = 108,000 + 19,800
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,40095,400 Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 127,800 - 32,400
Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,40095,400 Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 The number of ounces of ocean scent to be purchased in each of the first two quarters of 2010
Problem Requirements • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010. • Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s 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 quarter’s 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 ofbudgeting 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