A company has provided a sales budget for the next four months. It bases its production budget on the sales budget, and has a policy that each month's ending inventory of finished product must be equal to 25% of the following month's sales needs. The direct materials purchases budget is based on the production budget. The company's policy for each month's ending inventory of raw materials is that they must be equal to 10% of the following month's production needs for raw materials. Given this information, the company can prepare direct materials purchases budgets for how many months?

Question

Business

Jesus Ellis

14 June, 23:49

A company has provided a sales budget for the next four months. It bases its production budget on the sales budget, and has a policy that each month's ending inventory of finished product must be equal to 25% of the following month's sales needs. The direct materials purchases budget is based on the production budget. The company's policy for each month's ending inventory of raw materials is that they must be equal to 10% of the following month's production needs for raw materials. Given this information, the company can prepare direct materials purchases budgets for how many months?

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Answers (1)

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Erin Gonzalez · Answer 1

only for two months

Explanation:

The company has information about the current ending inventory for this month which will become next month's beginning inventory. Since next month's beginning inventory is equivalent to 25% of next month's total sales needs, it can estimate the sales needs for next month.

With this information, the company can estimate the necessary purchases of direct materials for next month and the estimated ending inventory of direct materials. Using the estimated ending inventory of direct materials as reference, it can estimate the purchases necessary for the following month. But since it doesn't have any more information about the sales needs, it cannot estimate any further direct materials purchases.