[missmay07]

I need to prepare a budgeted income statement for the month of October through gross profit on sales and a cost of goods sold schedule. Information I have are:

- Expected sales for October $700,000
November $750,000
December $800,000
- Cost of goods sold is expected to be 60% of sales
- Desired ending merchandise inventory is 20% of the next month's cost of goods sold (so I worked out (750,000x60%=450,000) x 20%=90,000)
- The beginning inventory at 1 October will be the desired amount (I got 700,000 x 60% = 420,000) x 20% = 84,000)

For the income statement I got
Sales 700,000
COGS (700,000 x 60%) (420,000)
Gross Profit 280,000

For the schedule I worked out
Beginning inventory at 1 October 84,000
Ending inventory at 31 October 90,000

But this would make the COGS 0.

Does anyone know if I'm right or even on the right track or can help me at all?
Really starting to confuse myself now.

[morgaine300]

I don't see how that would make COGS 0. It's still 420,000. I see what you're leaving out, but I don't know where you're getting 0 from.

Based on the info given, I'm assuming the "COGS schedule" they want is actually a purchases budget. Figuring out COGS was easy - it's just the 60%, so there's no "schedule" in that. When they give beginning and "desired ending" inventory, it's usually because they're wanting a purchases budget. I am only assuming that's what they're calling a "COGS schedule."

It's an adjustment you have to make to the COGS. Remember that COGS is an amount charged off to the expense account at the time the merchandise is sold, and does not necessarily coincide with the actual purchases. You can't purchase just as you sell - you have to purchase ahead of time. That's why they have a desired ending inventory, so they have inventory already on hand ready to sell. So of November's $450,000, they want $90,000 already on hand at the end of October.

So if in October they are going to sell $420,000 (at cost), but they also want to end the month with an extra $90,000, how much do they actually need in total?

But, they already have $84,000 from the beginning inventory, so they don't need to purchase that amount, so how much do they then need to actually purchase?

COGS (to sell, but at cost)
+ desired ending inventory (extra they need)
= total inventory needed
- beginning inventory (because they already have it)
= amount needed to purchase

It's a standard inventory adjustment and can be used for any type of inventory. (If you're in managerial, this will also be used for finished goods inventory and raw materials inventory.)