O'Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2. The company has budgeted sales as follows: Cost of goods sold is expected to be 75% of sales. The company would like to have ending inventory each month equal to 25% of the following month's predicted cost of sales. The total cost of purchases in January Year 2 is:

Question

O'Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2. The company has budgeted sales as follows:  Cost of goods sold is expected to be 75% of sales. The company would like to have ending inventory each month equal to 25% of the following month's predicted cost of sales. The total cost of purchases in January Year 2 is:

Quizplus · Accepted Answer

Budgeted purchases of inventory = Budgeted cost of goods sold + Desired ending inventory - Beginning inventory
Budgeted purchases of inventory in January = (Budgeted sales in January × Cost of goods sold percentage) + (Budgeted sales in February × Cost of goods sold percentage × Desired percentage of inventory on hand) - (Budgeted sales in January × Cost of goods sold percentage × Desired percentage of inventory on hand)
Budgeted purchases of inventory in January = ($46,500 × 75%) + ($51,000 × 75% × 25%) - ($46,500 × 75% × 25%) = $34,875 + $9,562.50 - $8,718.75 = $35,718.75 (rounded to $35,719)

O'Hare Company Is in the Process of Preparing a Purchases