Problem 11 - Accounting

Question

Anticipated sales for Sure Grip Tire Company were 42,000 passenger car tires and 15,000 truck tires. There were no anticipated beginning or ending finished goods inventories for either product. Rubber and steel belts are used in producing passenger car and truck tires according to the following table: \begin{tabular}{lrl} & Passenger Car & Truck \\ \hline Rubber & \(30 \mathrm{lbs}\). per unit & \(70 \mathrm{lbs}\). per unit \\ Steel belts & \(4 \mathrm{lbs}\). per unit & \(10 \mathrm{lbs}\). per unit \end{tabular} The purchase prices of rubber and steel are \(\$ 3.20\) and \(\$ 4.20\) per pound, respectively. The desired ending inventories of rubber and steel belts are 40,000 and 10,000 pounds, respectively. The estimated beginning inventories for rubber and steel belts are 46,000 and 8,000 pounds, respectively. Prepare a direct materials purchases budget for Sure Grip Tire Company for the year ended December 31, \(2010 .\)

Step-by-Step Solution

Answer

The total cost of rubber purchases is $7,372,800 and steel purchases is $1,344,000, totaling $8,716,800.

Step 1: Calculate Total Rubber Needed for Production

Calculate the total amount of rubber needed for passenger and truck tires.\[\text{Passenger Car Rubber} = 42,000 \text{ units} \times 30 \text{ lbs/unit} = 1,260,000 \text{ lbs}\] \[\text{Truck Rubber} = 15,000 \text{ units} \times 70 \text{ lbs/unit} = 1,050,000 \text{ lbs}\] \[\text{Total Rubber Needed} = 1,260,000 \text{ lbs} + 1,050,000 \text{ lbs} = 2,310,000 \text{ lbs}\]

Step 2: Calculate Total Steel Belts Needed for Production

Calculate the total amount of steel belts needed for passenger and truck tires.\[\text{Passenger Car Steel} = 42,000 \text{ units} \times 4 \text{ lbs/unit} = 168,000 \text{ lbs}\] \[\text{Truck Steel} = 15,000 \text{ units} \times 10 \text{ lbs/unit} = 150,000 \text{ lbs}\] \[\text{Total Steel Needed} = 168,000 \text{ lbs} + 150,000 \text{ lbs} = 318,000 \text{ lbs}\]

Step 3: Determine Total Rubber Required

To determine the total rubber required, consider both the production needs and desired ending inventory.\[\text{Total Rubber Required} = 2,310,000 \text{ lbs (for production)} + 40,000 \text{ lbs (desired ending inventory)} = 2,350,000 \text{ lbs}\]

Step 4: Determine Total Steel Belts Required

To determine the total steel belts required, consider both the production needs and desired ending inventory.\[\text{Total Steel Required} = 318,000 \text{ lbs (for production)} + 10,000 \text{ lbs (desired ending inventory)} = 328,000 \text{ lbs}\]

Step 5: Calculate Rubber to Purchase

Subtract the beginning inventory of rubber to find how much needs to be purchased.\[\text{Rubber to Purchase} = 2,350,000 \text{ lbs (total requirement)} - 46,000 \text{ lbs (beginning inventory)} = 2,304,000 \text{ lbs}\]

Step 6: Calculate Steel Belts to Purchase

Subtract the beginning inventory of steel to find how much needs to be purchased.\[\text{Steel to Purchase} = 328,000 \text{ lbs (total requirement)} - 8,000 \text{ lbs (beginning inventory)} = 320,000 \text{ lbs}\]

Step 7: Calculate Cost of Rubber and Steel Purchases

Determine the total cost for purchasing the required quantities.\[\text{Cost of Rubber} = 2,304,000 \text{ lbs} \times \\(3.20/\text{lb} = \\)7,372,800\] \[\text{Cost of Steel} = 320,000 \text{ lbs} \times \\(4.20/\text{lb} = \\)1,344,000\]

Step 8: Prepare Direct Materials Purchases Budget

Summarize the information into a budget format.\[\text{Rubber Purchases} = 2,304,000 \text{ lbs, costing } \\(7,372,800\] \[\text{Steel Purchases} = 320,000 \text{ lbs, costing } \\)1,344,000\] \[\text{Total Cost of Purchases} = \\(7,372,800 + \\)1,344,000 = \$8,716,800\]

Key Concepts

Inventory Management

Inventory management is a crucial component for any production-focused company. It involves the careful tracking of stock levels, including raw materials, work-in-progress, and finished goods.
In the context of a direct materials budget, inventory management ensures that the required raw materials are in place to meet production needs without excess waste or stockouts.
This reduces holding costs and ensures efficiency in the production process.

• Maintain optimal stock levels: Avoiding overstocking or understocking ensures that production runs smoothly but does not incur additional holding costs.
• Forecast demand accurately: Proper demand forecasting helps prepare for production needs, ensuring materials are available when needed.
• Monitor usage rates: Regularly tracking how quickly inventory is being used allows for timely reordering before levels get too low.

Effective inventory management aligns closely with production schedules, which relies on accurate predictions of future sales and production volumes.

Cost Accounting

Cost accounting involves tracking, recording, and analyzing costs associated with a company’s operations. In the direct materials budget, understanding the costs associated with raw materials like rubber and steel is essential.
This includes considering both the price per unit and the quantities needed.
The ultimate goal is to efficiently manage costs to maximize profitability.

• Allocate costs efficiently: Identifying the cost of each component can help in better allocation of resources.
• Ensure accurate pricing: Proper cost accounting helps set accurate pricing for products by knowing how much it costs to produce them.
• Evaluate cost-saving opportunities: Regular analysis can identify areas to cut waste and reduce expenses.

Overall, cost accounting provides valuable insights into where money is going and helps in creating strategies to improve financial performance.

Production Budgeting

Production budgeting is a method of planning and controlling the manufacturing process and determining how many units need to be produced.
This is based on anticipated sales, ensuring that production meets demand without excessive output.
The focus is on balancing production capacity with the demand forecast.

• Align production with sales forecasts: Ensure that the number of units produced matches what the market is expected to need.
• Optimize resource use: Efficient use of materials and labor ensures cost-effectiveness in production.
• Adjust for variability: Stay flexible to adapt the production schedule as forecasts and actual sales data deven are updated.

Production budgeting is vital for maintaining operational efficiency while meeting market demands.

Resource Planning

Resource planning involves coordinating all necessary resources to achieve the production goals efficiently and effectively. This includes planning for manpower, machinery, and materials.
In the case of the Sure Grip Tire Company, resource planning would involve coordinating these elements to ensure they can produce both the passenger and truck tires as forecasted.

• Integrate planning across the organization: Develop a cohesive strategy that aligns production, inventory, and supply chain processes.
• Balance resource allocation: Ensure that resources are distributed based on demands, not just availability.
• Plan for future capacity: Resource planning includes preparing for future growth, ensuring the company can scale up or down as needed.

Successful resource planning results in a synchronized operation that minimizes downtime and maximizes productivity.