[lilphill]

Hello I am having problems answering this question on purchaseing budgets.
THE ANSWER I GOT WAS but I don't think this is right. I may have the wrong set up. Can some one plese help me


Beginning April may June
Beginning inventory 9540 9180 9810
Add desired level inv 9180 9810 9450

Purchases 18720 18990 19260

THE QUESTION

Month Budgeted sales
March 150,000
April 159,000
May 153,000
June 163000
July 157500
The gross profit rate is 40 percent and the desired inventory level is 30 percent of next month cost ogf goods sold. Prepare a purchases budget for April through June.

[morgaine300]

To start with, I'm not sure where you got your desired ending inventory. It's a lot more useful if we can see your calculations and know exactly where you went wrong. I can't come up with those numbers doing "common errors."

First, it's not gross margin you're interested in. It's cost of goods sold. That's your cost of what you sold, and therefore is what is coming out of your inventory each month as it's sold. So it's really 60% of sales that you want.

Then desired ending inventory is 30% of next month's cost of goods sold. So for instance, May's cost of goods sold is 60% of 153,000 in sales, which is 91,800. But since desired ending inventory is 30% of next month's cost of goods sold, then 30% of 91,800 is our desired ending inventory for April. In April we're looking ahead to what we need in May.

And you don't add the beginning and ending inventories together. That really has no meaning. You would have beginning inventory, you'd add purchases, subtract what got sold, and you'd have an ending inventory. So adding beginning and ending inventory doesn't have any meaning in that.

There's an adjustment for this that you need to have memorized. It works for amounts to be produced in order to sell, amounts to be purchased in order to sell, and materials to be purchased to go into things being produced. i.e. anything that has an inventory account.

You take the needed amount (in this case cost of goods sold, since that's the amount that will be sold), add the desire ending inventory (cause you want that much extra), and subtract beginning inventory (because you already have it and don't need to purchase it.)