Craftco has prepared the following sales budget: Cost of goods sold is budgeted at 60% of sales and the inventory at the end of March was $36,000.Desired inventory levels at the end of each month are 20% of the next month's cost of goods sold.What is the desired beginning inventory on July 1?

Question

Craftco has prepared the following sales budget:  Cost of goods sold is budgeted at 60% of sales and the inventory at the end of March was $36,000.Desired inventory levels at the end of each month are 20% of the next month's cost of goods sold.What is the desired beginning inventory on July 1?

Quizplus · Accepted Answer

Firstly, we need to find out the cost of goods sold (COGS) for July based on the sales budget. Looking at the sales budget, the sales for July are budgeted at $360,000. Therefore, the COGS for July would be 60% of $360,000 which is $216,000.

Next, we need to calculate the desired ending inventory for July. Based on the information given, the desired ending inventory for July would be 20% of the next month's COGS, which is 20% of $320,000 (COGS for August) or $64,000.

Using the formula:

Ending Inventory = Beginning Inventory + Purchases - COGS

We can rearrange the formula to find:

Beginning Inventory = Ending Inventory - Purchases + COGS

To find the desired beginning inventory for July, we need to determine the purchases for July. We can do this by using the formula:

Purchases = COGS + Ending Inventory - Beginning Inventory

Substituting the values we have:

$216,000 + $64,000 - Beginning Inventory - $36,000 = Purchases

Simplifying:

$244,000 - Beginning Inventory = Purchases

Now we can substitute this value back into the formula to find the desired beginning inventory:

Beginning Inventory = Ending Inventory - Purchases + COGS
Beginning Inventory = $64,000 - ($244,000 - Beginning Inventory) + $216,000
Beginning Inventory = $64,000 - $244,000 + Beginning Inventory + $216,000
Beginning Inventory = $36,000 + Beginning Inventory
Beginning Inventory = $72,000/2
Beginning Inventory = $36,000

Therefore, the desired beginning inventory on July 1 is $36,000. The correct answer is D.

Craftco Has Prepared the Following Sales Budget: Cost of Goods