CHAPTER 9 Budgeting 393required units. According to the accounting records, beginning finished goods inventory consists of
2500 bikes. Given the anticipated increase in sales volume, the inventory manager wants to increase
finished goods inventory to 3500 units per quarter. Anni calculates the number of bikes that will be
manufactured each period, factoring in the sales forecast and both beginning and targeted ending finished
goods inventory levels (illustrative example 9.6).
ILLUSTRATIVE EXAMPLE 9.6Mountain Blue Bikes production budget
Mountain Blue Bikes
Production budget for the year ended 31 December 2016Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Expected unit sales (refer sales budget)
Add: Desired ending inventory
Total required units
Less: Beginning inventory30 000
3 500
33 500
2 50020 000
3 500
23 500
3 50010 000
3 500
13 500
3 50040 000
3 500
43 500
3 500
Required production units 31 000 20 000 10 000 40 000 101 000As a result of the analysis, it is estimated that 101 000 mountain bikes will need to be produced in
- This production level highlights the influence of inventory policy and sales requirements on pro-
duction output. The production budget, in turn, provides the basis for determining the budgeted costs for
each manufacturing cost element, as explained below.
Developing the materials budget
Once the production output has been estimated, Anni can determine the amount of materials that must
be purchased for use in the manufacturing process and to meet the desired finished goods inventory. The
entity carries inventory of the materials used in the manufacture of the bike, and the beginning materials
inventory is $700 000. After discussions with the material requisitions manager, Anni was advised that
the cost per unit of materials per bike to be purchased from suppliers this year is expected to be the
same as last year, which was $140 per bike. Management has determined that due to the expected sales
increase they want ending materials inventory per quarter to be $840 000.
Given these assumptions, Anni prepares the following materials budget, which shows that a total of
$14 280 000 of material will be purchased during the year (illustrative example 9.7).
ILLUSTRATIVE EXAMPLE 9.7Mountain Blue Bikes materials budget
Mountain Blue Bikes
Materials budget for year ended 31 December 2016Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Units to be produced (refer production
budget)
Material cost per bike
Cost of materials required for production
Target ending materials inventory
Total materials required
Less: Beginning materials inventory$31 000
× $140
4 340 000
840 000
5 180 000
700 000$20 000
× $140
2 800 000
840 000
3 640 000
840 000$10 000
× $140
1 400 000
840 000
2 240 000
840 000$40 000
× $140
5 600 000
840 000
6 440 000
840 000$101 00014 140 000Total cost of material purchases $4 480 000 $2 800 000 $1 400 000 $5 600 000 $ 14 280 000