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Demonstration Problem

Accounting What the Numbers Mean 9e. Demonstration Problem. Chapter 14 – Exercise 3 Purchases Budget. Problem Definition. Each gallon of Old Guard, a popular after-shave lotion, requires 6 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2010 is:.

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Demonstration Problem

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  1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 14 – Exercise 3 Purchases Budget

  2. Problem Definition • Each gallon of Old Guard, a popular after-shave lotion, requires 6 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2010 is: Quarter I 10,000 gallons Quarter II 18,000 gallons Quarter III 11,000 gallons • Management’s policy is to have on hand at the end of every quarter enough ocean scent inventory to meet 30% of next quarter’s production needs. At the beginning of Quarter I, 18,000 ounces of ocean scent were on hand.

  3. Problem Requirements • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010. • Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s production.

  4. Problem Solution • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010:

  5. Problem Solution • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010: • Step 1: Set up the “raw material inventory / usage” model and enter all known amounts.

  6. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory

  7. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Calculation: 18,000 beginning inventory amount was given

  8. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases

  9. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ?

  10. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use

  11. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ?

  12. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory

  13. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Calculation: 30% of next quarter’s usage = 6 ounces * 18,000 gallons * 30%

  14. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Usage

  15. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (32,400) Usage 60,000 Calculation: 6 ounces * 10,000 gallons to be produced in Quarter I

  16. Problem Solution • Step 1: Set up the “raw material inventory / usage” model and enter all known amounts. • Step 2: Working backwards (up the model): - calculate raw materials available for use - calculate purchases

  17. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases ? Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: Raw material available for use = Usage + Ending Inventory = 32,400 + 60,000

  18. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 92,400 - 18,000

  19. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Next, repeat Step 1 and Step 2 for Quarter II

  20. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000

  21. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000 Calculation: QI Ending Inventory becomes QII Beginning Inventory

  22. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases74,400 Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000

  23. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400? Raw material available for use 92,400 Less: Ending inventory (32,400) Usage 60,000

  24. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use92,400 Less: Ending inventory (32,400) Usage 60,000

  25. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400) Usage 60,000

  26. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory(32,400) Usage 60,000

  27. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400)(19,800) Usage 60,000 Calculation: 30% of next quarter’s usage = 6 ounces * 11,000 gallons * 30%

  28. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400)(19,800) Usage 60,000

  29. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400 ? Less: Ending inventory (32,400) (19,800) Usage 60,000 108,000 Calculation: 6 ounces * 18,000 gallons to be produced in Quarter II

  30. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,400 ? Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 Calculation: Raw material available for use = Usage + Ending Inventory = 108,000 + 19,800

  31. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,40095,400 Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 127,800 - 32,400

  32. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 18,000 32,400 Add: Purchases 74,40095,400 Raw material available for use 92,400127,800 Less: Ending inventory (32,400)(19,800) Usage 60,000 108,000 The number of ounces of ocean scent to be purchased in each of the first two quarters of 2010

  33. Problem Requirements • Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010. • Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s production.

  34. Problem Solution • Why does management plan for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s production? Because inventory provides a “cushion” for delivery delays or production needs in excess of the production forecast.

  35. Accounting What the Numbers Mean 9e You should now have a better understanding ofbudgeting for purchases. Remember that there is a demonstration problem for each chapter that is here for your learning benefit. David H. Marshall Wayne W. McManus Daniel F. Viele

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