The controller of X Company estimates sales and production f

The controller of X Company estimates sales and production for the first four months of 2016 as follows: January February March April Sales $30,200 $39,000 $55,000 $25,900 Production in units 1,010 1,670 2,140 2,510 Sales are 40% cash and 60% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 40% of credit sales are collected. It takes 4 kg of direct material to produce a finished unit, and direct materials cost $5 per kg. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 60% the following month. Ending direct materials inventory for each month is 40% of the next month’s production needs. January’s beginning materials inventory is 1,616 kg. Suppose that both accounts receivable and accounts payable are zero at the beginning of January. Answer the following questions:

What is direct materials inventory balance at the end of March?

what are Material purchases cost for February?

what are cash payments on account for February?

What is the cash balance for the period january march?

Solution

Part 1 : As ending direct materials inventory for each month is 40% of the next month’s production needs, therefore the direct material inventory balance at the end of March will be 40% of April\'s production needs.

April\'s production needs = Production in units in April*direct material required to produce one unit

= 2,510 units*4 kg = 10,040 kg

Direct material inventory(in kg) at the end of march = 40%*April\'s production needs

= 40%*10,040 kg = 4,016 kg

Direct material inventory(in $) at the end of march = 4,016 kg*$5 per kg = $20,080

Part 2 : For calculating material prurchase cost for February, we need to calculate material purchase in kg and for that we need to calculate opening and closing material inventory in the month of February

February production needs = Production in units in February*direct material required to produce one unit

= 1,670 units*4 kg = 6,680 kg

March production needs = Production in units in February*direct material required to produce one unit

= 2,140 units*4 kg = 8,560 kg

Closing inventory in the month of January = 40%*February production needs = 40%*6,680 kg = 2,672 kg

Closing inventory in the month of February = 40%*March production needs = 40%*8,560 kg = 3,424 kg

Material required to be purchased in February = Closing Inventory+Production needs in February-Opening Inventory

= 3,424 kg+6,680 kg-2,672 kg = 7,432 kg

Material purchases cost for February = Material purchased*Material cost per kg = 7,432 kg*$5 per kg = $37,160

Part 3 : Cash payment on account in the month of February is 40% of the purchases in February and 60% of the purchases in January.

January production needs = 1,010*4 kg = 4,040 kg

Material purchased in January = Closing inventory in January+January production needs-Opening Inventory

= 2,672 kg+4,040 kg-1,616 = 5,096 kg

Material purchase cost in January = 5,096 kg*$5 per kg = $25,480

Cash payment on account in February = (60%*material purchase in January)+(40%*material purchased in February)

= (60%*$25,480)+(40%*$37,160) = $15,288+$14,864 = $30,152

Part 4 : For calculating cash balance for January March, we need to prepare a cash budget which is shown as follows:-

Cash Budget (Amount in $)

Working Note:

1) Material Purchase in March = March production needs+Closing material in March-Opening material in March

= 8,560 kg+4,016 kg-3,424 kg = 9,152 kg

2) It is assumed that the beginning cash balance in the month of January is zero.