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Budgeting part 1 – ACCA Performance Management (PM)

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  5. Hello,
    when we are making production budget, why don’t you subtract the opening inventory from sales budget?
    because we already have some in opening inventory which means we are gonna have to produce less number of units?
    please clear this for me, Thank you.

  8. Hello Sir,

    I didn’t quite understand the logic why we added the inventory movements to our budgeting figure during question (b)? What if it was the case that the opening balance of X is 500 units and closing balance of X is 300 units. In other words, what would happen if the we had a negative movement of 200 units?

    In these cases I always think in a way to maintain a low level of inventories, and thus I first though in a way that I would sell what I have available on hand (in the inventories), then I would produce the rest, which in this case the production budget for X would be 1,400 units since we already have 600 units of X on hand at the time being as closing balance. Is this a wrong approach Sir?

    Thanks a lot in advance for the clarification.

    Best regards,
    Can

    • Several problems 馃檪

      They start the year with 500 units in inventory. They are selling 2,000 units and so they will use the 500 units they already have, which means they will need to produce the other 1,500 units. However, this would leave them with zero inventory at the end of the year. But the question says that they wish to end up with 600 units at the end of the year. Therefore in addition to the 1,500 units they are already producing they also need to produce another 2,100 units so as to end up with the required inventory.

      Remember from Paper FA (was F3), or whatever exempted you from that exam, that the goods sold = opening inventory + production – closing inventory.

      • Dear Sir,

        Thank you very much for the clarification, I actually did not understand from the inventory schedule that the question was instructing us to bring ending inventory balance to 600 units for product X. I understood that as of today we have 600 units on hand.. 馃檪 common mistake of approaching the question on an auditor’s perspective 馃檪

        Everything is clear now. Thank you very much.

        Best regards,
        Can

      • Hi John, am pleased with the explanation. thanks for that however have one silly doubt –

        Option 1 : With the above formula (got exempt for F3) – Opening inventory (500) + Production (2000)- closing Inventory (600) = 1900 right ? why it is 2100 then ?

        Option 2 : From the above explanation I understand that

        My requirement is = 2000 for production + 600 balance at the end of year = So, should have 2600 unit of inventory – Already 500 units are in hand/warehouse. So remaining purchase or production of inventory is 2100.

        May I know what logic is correct ? and why the other one is wrong ?

        Thanks in advance,

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