Paraclete has helped me with this budget for a furniture chain, however I am confusing myself. A number of other students have worked this out differently using various figures. As such, I am respectfully requesting clarification.

My understanding of the inventory budget rows (months in columns across the top):

1. Opening inventory balance: this number has been provided & I understand that each month's ending balance becomes the next month's closing balance

2. Purchased inventories: we have been given six months worth of data and one of the accounts is labelled 'purchases'. I assumed that this related to the inventory purchased by the business and thus would be in this column.

3. Cost of inventories sold: I have worked this out using the provided profit margin & the provided sales reveues for each month to get the profit margin and then another formula to work out COGS

4. Closing balance: I have used the formula CLOSING BALANCE = OPENING BALANCE + PURCHASED INVENTORIES - COST OF GOODS SOLD

The other piece of information that has been provided is that the firm has decided that it is in its best interests to maintain a minimum inventories level of $25,000 over the period to 30 Dec (six months).

I cannot for the life of me work out what to do with this figure. One of the other students used it in the 'purchased inventories' row (point 2 above) but I don't really follow that. If anything, the minimum level would be the ENDING inventory balance of each month but I can't reconcile this in my head either. We have been given 'purchases' and that is what I used... and each month's ending inventory balance is therefore different.

1. Do I have the inventory budget format rows correct?
2. Does the calculation of COGS sound correct?
3. Is the closing balance formula correct?
4. Does the 'purchases' column that we have been given contain the figures that I need to input in 'purchased inventories' in my budget or is it something different entirely?
5. What on earth do I do with the $25,000 figure... everyone thinks different things & I have not yet used it.

Please, please help...

Thanks,

Parrot

Quote:

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Originally Posted by ParrotBird48516

Paraclete has helped me with this budget for a furniture chain, however I am confusing myself. A number of other students have worked this out differently using various figures. As such, I am respectfully requesting clarification.

My understanding of the inventory budget rows (months in columns across the top):

1. Opening inventory balance: this number has been provided & I understand that each month's ending balance becomes the next month's closing balance

2. Purchased inventories: we have been given six months worth of data and one of the accounts is labelled 'purchases'. I assumed that this related to the inventory purchased by the business and thus would be in this column.

3. Cost of inventories sold: I have worked this out using the provided profit margin & the provided sales reveues for each month to get the profit margin and then another formula to work out COGS

4. Closing balance: I have used the formula CLOSING BALANCE = OPENING BALANCE + PURCHASED INVENTORIES - COST OF GOODS SOLD

The other piece of information that has been provided is that the firm has decided that it is in its best interests to maintain a minimum inventories level of $25,000 over the period to 30 Dec (six months).

I cannot for the life of me work out what to do with this figure. One of the other students used it in the 'purchased inventories' row (point 2 above) but I don't really follow that. If anything, the minimum level would be the ENDING inventory balance of each month but I can't reconcile this in my head either. We have been given 'purchases' and that is what I used...and each month's ending inventory balance is therefore different.

1. Do I have the inventory budget format rows correct?
2. Does the calculation of COGS sound correct?
3. Is the closing balance formula correct?
4. Does the 'purchases' column that we have been given contain the figures that I need to input in 'purchased inventories' in my budget or is it something different entirely?
5. What on earth do I do with the $25,000 figure...everyone thinks different things & I have not yet used it.

Please, please help...

Thanks,

Parrot

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OK so policy says inventory is to be a minimum of $25000 so you need to adjust your purchases by supplementary purchases to comply with the policy.
What you need to do is decide when you will make this adjustment since you do not know until month end whether you are successful or not but you have the data and can anticipate the outcome from the sales budget

So

Month 1

Opening inventory 25000
Sales 20000
Purchases 15000
Supplementary 5000
Closing inventory 25000

Month 2
Opening inventory 25000
Sales 20000
Supplementary 5000
Purchases 15000
Closing inventory 25000

Now I have assumed some numbers and I don't know what numbers you have but the question is obviously looking for your solution