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Purchases Budget Problem for X-Scent Inventory in Bracer Production

This exercise examines the purchases budget for X-scent, a key ingredient in Bracer after-shave lotion. With the budgeted production of Bracer set for the first three quarters of 2006, the task is to calculate the ounces of X-scent to be purchased in the first two quarters. Additionally, we explore management's policy of maintaining sufficient inventory levels to meet future production needs rather than solely relying on current quarter requirements. The solution incorporates inventory models to assess raw materials available for each quarter.

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Purchases Budget Problem for X-Scent Inventory in Bracer Production

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  1. Accounting What the Numbers Mean 7e Demonstration Problem Chapter 14 – Exercise 3 Purchases Budget

  2. Problem Definition • Each gallon of Bracer, a popular after-shave lotion, requires 2 ounces of x-scent. Budgeted production of Bracer for the first three quarters of 2006 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 x-scent inventory to meet 25% of next quarter’s production needs. At the beginning of Quarter I, 5,000 ounces of x-scent were on hand.

  3. Problem Requirements • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006. • 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.

  4. Problem Solution • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006:

  5. Problem Solution • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006: • Step 1: Set up the “raw material inventory / usage” model and enter all known amounts.

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

  7. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Calculation: 5,000 beginning inventory amount was given

  8. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases

  9. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ?

  10. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use

  11. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ?

  12. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory

  13. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Calculation: 25% of next quarter’s usage = 2 ounces * 18,000 gallons * 25%

  14. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Usage

  15. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Usage 20,000 Calculation: 2 ounces * 10,000 gallons to be produced in Quarter I

  16. 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

  17. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: Raw material available for use = Usage + Ending Inventory = 20,000 + 9,000

  18. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 29,000 - 5,000

  19. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Next, repeat Step 1 and Step 2 for Quarter II

  20. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  21. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: QI Ending Inventory becomes QII Beginning Inventory

  22. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  23. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000? Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  24. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use29,000 Less: Ending inventory (9,000) Usage 20,000

  25. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000) Usage 20,000

  26. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory(9,000) Usage 20,000

  27. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000 Calculation: 25% of next quarter’s usage = 2 ounces * 11,000 gallons * 25%

  28. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000

  29. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: 2 ounces * 18,000 gallons to be produced in Quarter II

  30. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: Raw material available for use = Usage + Ending Inventory = 36,000 + 5,500

  31. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,00032,500 Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 41,500 - 9,000

  32. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,00032,500 Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 The number of ounces of x-scent to be purchased in each of the first two quarters of 2006

  33. Problem Requirements • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006. • 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.

  34. 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.

  35. Accounting What the Numbers Mean 7e 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

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