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Demonstration Problem
Chapter 14 – Exercise 3
Purchases Budget
AccountingWhat the Numbers Mean 9e
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 gallonsQuarter II 18,000 gallonsQuarter 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
a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010.
b. 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:
Beginning Inventory Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Qtr I
Calculation:
18,000 beginning inventory amount was given
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000
Add: Purchases
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 Add: Purchases ?
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ?Raw material available for use
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ?Raw material available for use ?
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ? Raw material available for use ?Less: Ending inventory
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400)
Qtr I
Calculation:
30% of next quarter’s usage = 6 ounces * 18,000 gallons * 30%
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ?Raw material available for use ?Less: Ending inventory (32,400)Usage
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases ?Raw material available for use ?Less: Ending inventory (32,400)Usage 60,000
Qtr I
Calculation:
6 ounces * 10,000 gallons to be produced in Quarter I
Qtr II
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:
Beginning Inventory 18,000Add: Purchases ?Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I
Calculation:
Raw material available for use = Usage + Ending Inventory = 32,400 + 60,000
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases 74,400Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I
Calculation:
Purchases = Raw material available for use - Beginning Inventory = 92,400 - 18,000
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases 74,400Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I
Next, repeat Step 1 and Step 2 for Quarter II
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000Add: Purchases 74,400 Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I
Calculation:
QI Ending Inventory
becomes QII Beginning Inventory
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400Raw material available for use 92,400 Less: Ending inventory (32,400)Usage 60,000
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400 ?Raw material available for use 92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400 ?Raw material available for use92,400Less: Ending inventory (32,400)Usage 60,000
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
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
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
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
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
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
Qtr I
Calculation:
30% of next quarter’s usage = 6 ounces * 11,000 gallons * 30%
Qtr II
Problem Solution
• Raw material inventory / usage model:
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
Qtr I Qtr II
Problem Solution
• Raw material inventory / usage model:
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
Qtr I
Calculation:
6 ounces * 18,000 gallons to be produced in Quarter II
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400 ?Raw material available for use 92,400 127,800 Less: Ending inventory (32,400) (19,800)Usage 60,000
108,000
Qtr I
Calculation:
Raw material available for use = Usage + Ending Inventory = 108,000 + 19,800
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400 95,400Raw material available for use 92,400 127,800 Less: Ending inventory (32,400) (19,800)Usage 60,000
108,000
Qtr I
Calculation:
Purchases = Raw material available for use - Beginning Inventory = 127,800 - 32,400
Qtr II
Problem Solution
• Raw material inventory / usage model:
Beginning Inventory 18,000 32,400
Add: Purchases 74,400 95,400Raw material available for use 92,400 127,800 Less: Ending inventory (32,400) (19,800)Usage 60,000
108,000
Qtr I
The number of ounces of ocean scent to be purchased in each of the first two quarters of 2010
Qtr II
Problem Requirements
a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010.
b. 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.
AccountingWhat the Numbers Mean 9e
David H. MarshallWayne W. McManus
Daniel F. Viele
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.