Question 3 Budgeted Cash Disbursements Langor Inc. is preparing its cash budget.
ID: 341943 • Letter: Q
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Question 3 Budgeted Cash Disbursements Langor Inc. is preparing its cash budget. The sales budget specifies the following budgeted monthly sales, in units: April May une July 10) 6,600 13,500 12,600 The company's inventory policy is to budget for finished goods inventoryequal to-30% of the following month's sales, and to budget for materials inventory equal to 50% of the following month's production requirements. Each unit of finished goods requires four pieces of material at a predicted price of $30 each. Management intends to take advantage of a 3/10, n/30 discount. Required Compute the budgeted cash disbursements during May for payment of accounts payable for material purchases. Assume material purchase are made evenly throughout the month.Explanation / Answer
Firstly we need to calculate the production requirements of month of May
Opening Inventory in May = May sales*30% = 6,600 units*30% = 1,980 units
Closing Inventory in May = June sales*30% = 13,500*30% = 4,050 units
Units to be produced for May = Units sold+Closing inventory-Opening Inventory
= 6,600 units+4,050 units-1,980 units = 8,670 units
Material required for May = 8,670 units*4 pieces = 34,680 pieces
Opening material inventory for may = May production requirements*50%
= 34,680*50% = 17,340 pieces
Calculation of June Production requirements
Opening Inventory in June = 4,050 units
Closing Inventory in June = July sales*30% = 12,600*30% = 3,780 units
Units to be produced for June = Units sold+Closing inventory-Opening Inventory
= 13,500 units+3,780 units-4,050 units = 13,230 units
Material required for June = 13,230 units*4 pieces = 52,920 pieces
Closing material inventory for may = June production requirements*50%
= 52,920*50% = 26,460 pieces
Material required to be purchased in May = Production requirement of May+Closing Material-Opening Material
= 34,680+26,460-17,340 = 43,800 pieces
As management intends to take 3% discount then the price after discount will be $29.10 ($30*0.97)
Cash disbursements budget = 43,800 pieces*$29.10 = $1,274,580
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