BOOK: Financial & Managerial Accounting for MBAs, 5e Page: ISBN 978-161853-232-9
ID: 2575121 • Letter: B
Question
BOOK: Financial & Managerial Accounting for MBAs, 5e
Page: ISBN 978-161853-232-9
Chapter 22, problem 22-41
Continuing problem P22-40, management is concerned that their supplier of raw materials will have a
strike. Determine the budget implications if management plans to increase the January-end raw materi-
als inventory to 130 percent of February’s production needs. Offer any recommendations you believe
appropriate
Cubs Incorporated Production Budget For the Months of January and February 2017 Februa 15000 2600 17600 3000 14600 March 13000 Janua Requirements for current sales Desired ending inventory Total requirements Less beginning inventory Production requirements 10000 3000 13000 2000 11000 Cubs Incorporated Purchases Budget For the Month of January 2017 Current requirements (units) Desired ending inventory Total requirements Less beginning inventory Purchases (units) Purchases (dollars at $12 each) 11000 1460 12460 1100 11360 136320Explanation / Answer
Calculation of Purchase budget of January with revised ending inventory
Particulars
Amount
Current Requirements
11,000
Desired Ending Inventory (14,600 x 130%)
18,980
Total Requirements
29,980
Less: Beginning Inventory
1,100
Purchases
28,880
Purchases in $
346,560
Cash Budget
Particulars
Amount
Total Amount
Beginning Balance
6,000
Receipts:
December Sales
337,500
January Sales
300,000
637,500
Total Cash Available
643,500
Disbursements:
Purchases
346,560
Direct Labor
132,000
Variable Overheads
66,000
Fixed Manufacturing Overheads
23,000
Variable Selling & Admin
50,000
Fixed Selling & Admin
17,000
Dividend
12,000
646,560
Ending Balance
(3,060)
If the management plans to keep the inventory at 130% of the next month production, then there will be a cash shortage to the company amounting to $3,060. However, net income will remain same in the current month.
Currently company’s desired inventory of raw material is 10% of next month production needs which is under revision to 130%. However, company does not need to keep such heavy ending inventory. Closing inventory can be restricted to 50% of the production needs which will be sufficient to meet the demands till the strike is over. This will also allow cash in hand to be sufficient enough to meet some immediate demands if they arise. Otherwise, management may also consider taking a short term loan for meeting the cash budget requirements.
Particulars
Amount
Current Requirements
11,000
Desired Ending Inventory (14,600 x 130%)
18,980
Total Requirements
29,980
Less: Beginning Inventory
1,100
Purchases
28,880
Purchases in $
346,560
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