14SE - Horngren'S Financial And Managerial Accounting

Question

Question: Brooks Company expects to sell 8,500 units for \(175 each for a total of \)1,487,500 in January and 2,500 units for \(200 each for a total of \)500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for \(280 each. Brooks’s target ending inventory is \)20,000 plus 50% of the next month’s cost of goods sold. Prepare Brooks’s inventory, purchases, and cost of goods sold budget for January and February

Step-by-Step Solution

Answer

Answer

Particular	January	February
Purchase	695,625	635,600
Cost of goods sold	1,041,250	350,000

Step 1 Preparation of operating budget

Brooks Company
Operating Budget
Particulars	January ($)	February ($)	Total ($)
Sale	$1,487,500	$500,000	$1,987,500
Cost of goods sold (70% of sales)	1,041,250	350,000	1,391,250
Add: Desired ending Inventory	195,000	480,600	675,600
Total Inventory	1,236,250	830,600	2,066,850
Less: Beginning Inventory	540,625	195,000	735,625
Budgeted Purchases	695,625	635,600	1,331,225

Step 2 Computation of desired ending inventory and beginning inventory for January

$$\begin{gathered} \mathbf{DesiredendingInventoryforJanuary}\mathbf{=}\mathbf{Targetedending}\mathbf{+}\mathbf{50}\mathbf{\%}\mathbf{ofFebruaryCOGS} \\ \mathbf{=}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{350}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{50}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{195}\mathbf{,}\mathbf{000} \\ \mathit{C}\mathit{O}\mathit{G}\mathit{S}\mathit{o}\mathit{f}\mathit{M}\mathit{a}\mathit{r}\mathit{c}\mathit{h}\mathbf{=}\left(UnitSold\times SellingPricePerUnits\right)\mathbf{\times }\mathbf{70}\mathbf{\%} \\ \mathbf{=}\left(4,700\times \$280\right)\mathbf{\times }\mathbf{70}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{921}\mathbf{,}\mathbf{200} \\ \mathbf{DesiredendingInventoryforFebruary}\mathbf{=}\mathbf{Targetedending}\mathbf{+}\mathbf{50}\mathbf{\%}\mathbf{ofMarchCOGS} \\ \mathbf{=}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{921}\mathbf{,}\mathbf{20} \\ \mathbf{BeginningInventory}\mathbf{=}\mathbf{TargetedendingInventory}\mathbf{+}\mathbf{50}\mathbf{\%}\mathbf{ofJanuaryCOGS} \\ \mathbf{=}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{1}\mathbf{,}\mathbf{041}\mathbf{,}\mathbf{250}\mathbf{\times }\mathbf{50}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{540}\mathbf{,}\mathbf{625} \end{gathered}$$