Question

Assume a company’s sales budget for April and May is 31,000 units and 33,000 units, respectively. Its production budget for the same two months is 28,000 units and 29,000 units, respectively. Each unit of finished goods required 6 pounds of raw materials. The company always maintains raw materials inventory equal to 30% of the following months production needs.

Also assume the company pays $2.00 per pound of raw material. It always pays for 60% of its raw material purchases in the month of purchase and the remainder in the following month. The accounts payable balance on March 31^st is $131,000. How much cash disbursements for raw materials purchases would be shown in the company’s cash budget for April?

Answer 1

Solution:

Budgeted raw material purchase quantity for April = Raw material required to meet April production + Desired ending inventory - Beginning inventory

= (28000*6) + (29000*6*30%) - (28000*6*30%) = 169800 pounds

Budgeted raw material purchases for april = 169800*$2 = $339,600

Cash disbursements for raw materials purchases would be shown in the company’s cash budget for April = Payment for march purchases + Payment for april purchases

= $131,000 + ($339,600*60%) = $334,760