Question

5-12 Preparing a production budget (LO 3) High Flyers manufactures competition stunt kites. In November, Jerry Box prepared the following production budget for the first quarter of the coming year. Desired ending inventory is based on the following month's budgeted sales.

	January	February	March	Quarter
Budgeted sales	20,000	35,000	30,000	85,000
Desired ending inventory	7,000	6,000	2,400	2,400
Kites needed	27,000	41,000	32,400	87,400
Less beginning inventory	4,000	7,000	6,000	4,000
Budgeted production	23,000	34,000	26,400	83,400

Following higher-than-expected sales in December, Jerry conducted an inventory count on January 2 and discovered that the company had only 2,000 completed kites on hand. He decided that given the brisk sales in December, the company should increase its desired ending inventory level from 20 to 25% of the next month's sales volume.

Required

a.Prepare a new production budget for the first quarter.

b.What other components of the master budget will be affected by this change?

Answer 1

High Flyers

a. New Production budget : ($)

	January	February	March	Quarter
Budgeted sales	20,000	35,000	30,000	85,000
Add: Desired Ending inventory	35,000×25% = 8,750	30,000×25% = 7,500	(2,400/20%)×25% = 3,000	3,000
Kites needed	28,750	42,500	33,000	88,000
Less: Beginning inventory	(2,000)	(8,750)	(7,500)	(2,000)
Budgeted production	26,750	33,750	25,500	86,000

b. The change will effects the balances of inventory and production, in master budget also there will be a change in budgets which are connected with those two items such are, Cash budget (Out flow from production overhead), direct material budget (to the extent of raw materials Purchased), Ending finished goods budget, and production budget.