Ask Me Help Desk - Merchandise purchase budgeting

Dear Morgaine300,

I read your explanation with thanks. One of my questions is how do you get the desired ending inventory and beginning inventory:

This is what I got so far...

Nov. Dec. Jan.
budgeted COGS 198,000 180,000 192,000

add:desired end Inv. 144,000(180k x 0.8) 153,600(192k x 0.8)
39,600(198k x 0.2) 36,000(180k x 0.2)

Less: Beginning Inv. (158,400)=198k x 0.8?? <== is this just 144k or 180,600?

I don't know if I am doing this right. Can I add the 20% merchandise purchase in the desired ending inventory section? And how can do calculate the befinning inventory when you don't know the COGS in Oct. Please help me one more time. The original question is attached below...

Thank you.

Preparing a Merchandise purchase budget.

Weller Industrial Gas corp. supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

Sales are budgeted at $330,000 for Nov. and $300,000 for Dec. and $320,000 for January. The company puchases 80% of its merchandise in the month prior to the month of sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase. The cost of goods sold is 60% of sales.

Statement of Financial position
Oct. 31

Cash: 22,000
A/R: 83,000
Inventory: 158,400
Property and equipment: 1,004,000
Total asset: 1,267,400

How can I prepare merchandise purchases budget for Nov. and Dec.? Usually the question will show you the desirable ending balance and beginning balance, but this one doesn't. I know the budgeted COGS for Nov. is 198,000 and 180,000 for dec. and What Do I do from here?
Please help~!

I think you are trying to make this more complicated than it is. You're still trying to use the inventory adjustment that you learned how to do and it's not necessary.

The 158,400 is the ending inventory for October -- you already know that. That's also the beginning inventory for November. You don't need to figure it out because you already have it. That's also the 80% that was purchased in the month before for November. The other 20% (39,600) was purchased in November. However, all of it -- all 198,000 of it -- was sold in November. So it's gone. The 20% doesn't figure into any inventory, because it's purchased and sold within the same month.

Then in November you purchased 144,000 (80% of Dec) and you still have it. If that's planned ahead of time, that is the desired ending inventory. It's also the beginning inventory for December. So each of those 80% numbers you're figuring out are the desired ending inventory, as well as beginning inventory for the next month.

It only asks for a pucrhases budget. That budget does not require that you make that adjustment. Depending on the info you've been given, you may need to use that adjustment in order to determine how much you need to purchase. The point of a purchases budget is to determine how much needs to be purchased, and you already have all those numbers. You're trying to take it to another step that doesn't need done.

If the problem is specifically asking for those numbers, I don't understand why. And even if so, you already have them. There isn't anything else to figure out.

I just thought of something to add. Here's an example of when you need to mess with that inventory adjustment.

You need 100,000 units to sell. You already have 2000 in beginning inventory. You have a desired ending inventory of 2500.

You need 100,000 to sell
+ 2500 to stay in inventory (desired ending inventory)
= 102,500 Total needed
- 2000 already in beginning inventory (cause you don't need to buy them)
= 100,500 units needed to purchase

Then when you have the units needed to purchase, you multiply by the price given and that gives you your purchases budget.

Do you see the difference between this and the problem you've been given? You haven't been given sales units and desired ending inventories and such. You've been given sales dollars amount and then told you need to buy 80% a month in advance and 20% in the month it's sold. It's entirely different information, and therefore is done in a different way. You're trying to mix it up with the above type problem, which is different.

Quote:

Originally Posted by morgaine300

I think you are trying to make this more complicated than it is. You're still trying to use the inventory adjustment that you learned how to do and it's not necessary.

The 158,400 is the ending inventory for October -- you already know that. That's also the beginning inventory for November. You don't need to figure it out because you already have it. That's also the 80% that was purchased in the month before for November. The other 20% (39,600) was purchased in November. However, all of it -- all 198,000 of it -- was sold in November. So it's gone. The 20% doesn't figure into any inventory, because it's purchased and sold within the same month.

Then in November you purchased 144,000 (80% of Dec) and you still have it. If that's planned ahead of time, that is the desired ending inventory. It's also the beginning inventory for December. So each of those 80% numbers you're figuring out are the desired ending inventory, as well as beginning inventory for the next month.

It only asks for a pucrhases budget. That budget does not require that you make that adjustment. Depending on the info you've been given, you may need to use that adjustment in order to determine how much you need to purchase. The point of a purchases budget is to determine how much needs to be purchased, and you already have all those numbers. You're trying to take it to another step that doesn't need done.

If the problem is specifically asking for those numbers, I don't understand why. And even if so, you already have them. There isn't anything else to figure out.

Hi, I had the same problem and your answer helped you a lot!! Thank you! Only thing is now after this it asks me to prepare cash budgets for November and December can you please help me set them up if possible? Thanks again

Quote:

Originally Posted by golobos2007

Hi, I had the same exact problem and your answer helped you alot!!! thank you!! only thing is now after this it asks me to prepare cash budgets for november and december can you please help me set them up if possible? thanks again

There is no information available from this post with which to do a cash budget. The only info here is about the inventory purchases and I've already gone over that. There isn't just some set way to do a budget that I can tell you - depends on the situations and what info there is.

Even if you gave me the entire problem, a cash budget is long and time-consuming to go through. Keep in mind we don't just do work for you, and it would be difficult to "give hints" for an entire cash budget. If you already have some of it done, or just don't understand one section of it or something, I can try to help with that. But a little difficult to explain in this space how to do an entire cash budget.

(Not to mention the original post is over a year old. Not like I really remember this.)