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Hello Respected Authorities,
I have an query in the budgeting chapter ref- Kaplan Practice kit P1 Management Accounting.
Page No. 48 question no. 163.
That while calculating the material inventory budget and material purchase budget the question is saying that “GS now wants to hold sufficient raw material inventory at the end of each month to cover the following month’s production.”
My question is that If Budgeted production (24000-500+2000) 25,500 units. So while calculating the closing inventory of material why does it takes 2000 units x 2kg instead of (25500/12) 2125 units x 2kg ?
Please explain it in details.
Hi,
It uses 2000 units as closing stock because the company have stated they want to hold inventory equal to one month of sales.At the beginning of the question it says that there will be sales of 24,000 sales per year which divided by 12 is 2000 units. This is how much stock must be held at the end of the period.
Therefore closing stock must be 2000 units @ 2kg per unit.The figure you have of 25,500 is the budgeted production cost which needs to be adjusted for additional closing stock requirements in order to find total raw materials purchases for that period.
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