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Demonstration Problem

Accounting What the Numbers Mean 7e. Demonstration Problem. Chapter 14 – Exercise 3 Purchases Budget. Problem Definition. Each gallon of Bracer, a popular after-shave lotion, requires 2 ounces of x-scent. Budgeted production of Bracer for the first three quarters of 2006 is:.

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Demonstration Problem

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  1. Accounting What the Numbers Mean 7e Demonstration Problem Chapter 14 – Exercise 3 Purchases Budget

  2. Problem Definition • Each gallon of Bracer, a popular after-shave lotion, requires 2 ounces of x-scent. Budgeted production of Bracer for the first three quarters of 2006 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 x-scent inventory to meet 25% of next quarter’s production needs. At the beginning of Quarter I, 5,000 ounces of x-scent were on hand.

  3. Problem Requirements • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006. • 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 x-scent to be purchased in each of the first two quarters of 2006:

  5. Problem Solution • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006: • 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 5,000 Calculation: 5,000 beginning inventory amount was given

  8. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases

  9. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ?

  10. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use

  11. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ?

  12. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory

  13. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Calculation: 25% of next quarter’s usage = 2 ounces * 18,000 gallons * 25%

  14. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Usage

  15. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases ? Raw material available for use ? Less: Ending inventory (9,000) Usage 20,000 Calculation: 2 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 5,000 Add: Purchases ? Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: Raw material available for use = Usage + Ending Inventory = 20,000 + 9,000

  18. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 29,000 - 5,000

  19. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Next, repeat Step 1 and Step 2 for Quarter II

  20. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  21. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000 Calculation: QI Ending Inventory becomes QII Beginning Inventory

  22. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases24,000 Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  23. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000? Raw material available for use 29,000 Less: Ending inventory (9,000) Usage 20,000

  24. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use29,000 Less: Ending inventory (9,000) Usage 20,000

  25. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000) Usage 20,000

  26. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory(9,000) Usage 20,000

  27. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000 Calculation: 25% of next quarter’s usage = 2 ounces * 11,000 gallons * 25%

  28. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000

  29. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,000 ? Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: 2 ounces * 18,000 gallons to be produced in Quarter II

  30. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,000 ? Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: Raw material available for use = Usage + Ending Inventory = 36,000 + 5,500

  31. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,00032,500 Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 Calculation: Purchases = Raw material available for use - Beginning Inventory = 41,500 - 9,000

  32. Problem Solution • Raw material inventory / usage model: Qtr I Qtr II Beginning Inventory 5,000 9,000 Add: Purchases 24,00032,500 Raw material available for use 29,00041,500 Less: Ending inventory (9,000)(5,500) Usage 20,000 36,000 The number of ounces of x-scent to be purchased in each of the first two quarters of 2006

  33. Problem Requirements • Calculate the number of ounces of x-scent to be purchased in each of the first two quarters of 2006. • 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 7e 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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