A company has provided a sales budget for the next four months (January, February, March, and April). It bases its production budget on the sales budget. According to company policy, each month's ending finished goods inventory must be equal to 25% of the following month's sales needs. The direct materials purchases budget is based on the production budget. Company policy states that each month's ending direct materials inventory must be equal to 10% of the following month's production needs for direct materials. For how many months can the company prepare direct materials purchases budgets?

Question

Quizplus · Accepted Answer

The company can prepare direct materials purchases budgets for two months because it needs to maintain 10% of the following month's production needs for direct materials as ending direct materials inventory, but it also needs to maintain 25% of the following month's sales needs as ending finished goods inventory. Therefore, the company can only prepare direct materials purchases budgets for the next two months where the ending direct materials inventory will be enough to produce finished goods inventory for the next two months.

A Company Has Provided a Sales Budget for the Next