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 inventory of finished product 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 inventory of raw materials must be equal to 10% of the following month's production needs for raw materials.For how many months can the company prepare direct materials purchases budgets?

Question

Quizplus · Accepted Answer

The company can only prepare the direct materials purchases budget for two months because it must maintain an ending inventory of raw materials equal to 10% of the following month's production needs for raw materials. Since the production budget is based on the sales budget, the inventory of finished product is also based on the sales budget. Therefore, the company can only plan for raw materials purchases for the next two months, which is equal to 10% of the company's production needs for those months.

A Company Has Provided a Sales Budget for the Next