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1:A company plans to sell 24,000 units of product R next year. Opening inventory of R is expected to be
2,000 units and PQ Co plans to increase inventory by 25 per cent by the end of the year. How many
units of product R should be produced next year? Sir, why didn’t they subtract the 2000 units and then calculate the percentage inventory after?2: Each unit of product Zeta requires 3 kg of raw material and 4 direct labour hours. Material costs $2 per kg and
the direct labour rate is $7 per hour.
The production budget for Zeta for April to June is as follows.
April May June
Production units 7,800 8,400 8,200 Raw material opening inventories are budgeted as follows. April May June 3,800 kg 4,200 kg 4,100 kg. The closing inventory budgeted for June is 3,900 kg.Material purchases are paid for in the month following purchase. What is the figure to be included in the cash budget for June in respect of payments for purchases? Sir, why wasn’t the closing inventory of 3900kg not considered in this calculation?I really can’t help you without seeing the questions and what they have done in the answers
For example, for your first question I would guess that instead of adding the opening inventory and then subtracting the closing inventory , maybe they just subtracting the increase in the inventory.
If they are questions in the current edition of the BPP Revision Kit then tell me the numbers of the questions and then I will be able to explain.
thank you.
1:answer= Required for sales 24,000
Required to increase inventory (2,000 × 0.25) 500
24,500. I thought if 24, 000 units are sells then they consist of opening inventory of 2000 units2:answer =Payments in June will be in respect of May purchases.
May
Production requirements (8,400 units × 3 kg) 25,200 kg
Closing inventory 4,100 kg
29,300 kg
Less opening inventory 4,200 kg
Purchase budget 25,100 kg
× $2 per kg = payment for purchases in June $50,200
Option A is the figure for the quantity of material to be paid for, not its value. Option B is the
value of June purchases, which will be paid for in July. If you selected option D your adjustments
for opening and closing material inventories were the wrong way round. I noticed that the 3900kg was not considered and yet its mentioned as the closing inventory. unless I have missed it out somewhere.1. Correct. If you want then take the sales less the opening inventory. plus the closing inventory – you get the same result.
2. But the payment is for the May purchases and therefore it is the opening and closing inventories for May that are relevant. 3900 is the closing inventory for June, which is not relevant.
Hi Mr. John.
I have a problem with this question from the revision kit. I have reviewed the answer but i cannot seem to understand how they have solved the question. Please be kind enough to explain the question to me in detail.Each unit of product Alpha requires 3 kg of raw material. Next month’s production budget for product
Alpha is as follows.Opening inventories:
Raw materials 15,000 kg
Finished units of Alpha 2,000 units
Budgeted sales of Alpha 60,000 units
Planned closing inventories:
Raw materials 7,000 kg
Finished units of Alpha 3,000 units
How many kilograms of raw materials should be purchased next month?
A 172,000
B 175,000
C 183,000
D 191,000The budget on selling 60,000 units of finished goods. In addition they intend to increase the inventory of finished goods by 3,000 – 2,000 = 1,000 units. Therefore they need to produce 60,000 + 1,000 = 61,000 units of finished goods.
This will require them to use 61,000 x 3kg = 183,000 kg of material.
They intend to reduce their inventory of material by 15,000 – 7,000 = 8,000 kg. So of there 183,000 kg they need, they will take 8,000 kg from inventory and therefore will need to purchase just the remaining 183,000 – 8,000 = 175,000 kg.
Have you watched my free lectures on budgeting? I work through an example that includes a similar situation to the situation in this question.
Thank you so much for the detailed explanation Mr. John. I will be sure to watch the lecture. Thanks again!
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