1.
Prepare the production budget for the three products of E Chemical Company for 20x2.
1.
Explanation of Solution
Production Budget: The production budget refers to that budget which
Prepare the production budget for the three products of E Chemical Company for 20x2:
Particulars | Product Y | Product D | Product N |
Sales for 20x2 | 60,000 | 40,000 | 25,000 |
Add: Inventory, 12/31/x2 | 5,200 | 2,800 | 2,400 |
Total required | 65,200 | 42,800 | 27,400 |
Less: Inventory, 12/31/x1 | (4,800) | (3,200 | ( 2,000) |
Required production in 20x2 | 60,400 | 39,600 | 25,400 |
Table (1)
Working note 1:
Calculate the inventory in 21/31/20x2:
For Product Y:
For Product D:
For Product N:
Working note 2:
Calculate the inventory in 21/31/20x1:
For Product Y:
For Product D:
For Product N:
2.
Calculate the E Chemical Company conversion cost budget for 20x2.
2.
Explanation of Solution
Budget: Budget is a statement prepared by the management for a specific tenure in future, to accomplish the goal of management in that particular period of time. Budget is basically expressed in the financial terms.
Calculate the E Chemical Company conversion cost budget for 20x2:
Step 1: Calculate the conversion hours required for Product Y.
Step 2: Calculate the conversion hours required for Product D.
Step 3: Calculate the conversion hours required for Product N.
Step 4: Calculate the total conversion hours required.
Step 5: Calculate the conversion cost budget for 20x2.
Therefore, the conversion cost budget for 20x2 is $245,040.
3.
Prepare the company’s raw material purchases budget for 20x2.
3.
Explanation of Solution
Prepare the company’s raw material purchases budget for 20x2:
Particulars | Amount ($) |
Quantity of Islin required for production in 20x2 | 100,820 |
Add: Required inventory, 12/31/x2 | 10,082 |
Subtotal | 110,902 |
Less: Inventory, 1/1/x2 | 10,000 |
Required purchases (gallons) | 100,902 |
Purchases budget | $504,510 |
Table (1)
Working note 1:
Calculate the quantity of Islin required for production in 20x2:
Working note 2:
Calculate the required inventory on 12/31/20x2:
Working note 2:
Calculate the inventory on 1/1/20x2:
Therefore, the company’s raw material purchases budget for 20x2 is $504,510.
4.
Conclude whether the management can use Philin raw material or Islin raw material for the 20x2 production.
4.
Explanation of Solution
Calculate whether the management can use Philin raw material or Islin raw material for the 20x2 production:
20x2 production requirements: | Amount ($) |
Philin raw material | 604,920 |
Islin raw material | 504,100 |
Increase in cost of raw material (A) | $100,820 |
Change in conversion cost from substituting Philin for Islin: | |
Philin raw material | $220,536 |
Islin raw material | 245,040 |
Decrease in conversion cost (B) | $(24,504) |
Net increase in production cost (C = A-B) | $76,316 |
Table (2)
Working note 1:
Calculate the production requirement in 20x2 for Philin raw material:
Working note 2:
Calculate the production requirement in 20x2 for Islin raw material:
Working note 3:
Calculate the conversion cost for Philin raw material:
Working note 4:
Calculate the conversion cost for Islin raw material:
The company can use Islin raw material because the cost of using Philin raw material is more than the cost of Islin ($76,316).
Hence, the company should use Islin raw material for the 20x2 production.
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Chapter 9 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
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