Question

Hardy Company’s cost of goods sold is consistently 60% of sales. The company plans ending merchandise inventory for each month equal to 20% of the next month’s budgeted cost of goods sold. All merchandise is purchased on credit, and 50% of the purchases made during a month is paid for in that month. Another 35% is paid for during the first month after purchase, and the remaining 15% is paid for during the second month after purchase. Expected sales are: August (actual), \(325,000; September (actual), \)320,000; October (estimated), \(250,000; and November (estimated), \)310,000. Use this information to determine October’s expected cash payments for purchases.

Short answer

The total expected cash payment for a purchase in October is $172,020.

Step-by-step solution

Meaning of Budget

A budget is a forecasted financial strategy for the future. Management uses it as an internal tool. This procedure aids managers in planning for the future and maintaining control over the organization's operations.

Determining October’s expected cash payments for purchases

	Dollars	Percent	Paid
For purchase from august	$194,400	15%	$29,160
For purchase from September	183,600	35%	64,260
For purchase from October	157,200	50%	78,600
Total cash payments for purchases			$172,020

Working Notes:

1. Formula to calculate cost of goods sold

$\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sales}\times 60\%$

Cost of goods sold
Particulars	August Amount ($)	September Amount ($)	October Amount ($)	November Amount ($)
Budgeted sales	325,000	320,000	250,000	310,000
Cost of goods sold	195,000	192,000	150,000	186,000

2) Calculation of the beginning and the ending inventory

Particulars	August Amount ($)	September Amount ($)	October Amount ($)	November Amount ($)
Cost of goods sold (Working note1)	195,000	192,000	150,000	186,000
Beginning inventory (20% of Cost of goods sold)	$39,000	$38,400	$30,000	$37,200
Ending inventory (from next month)	$38,400	$30,000	$37,200	-

3) Calculation of Merchandise purchase budget

Particulars	August Amount ($)	September Amount ($)	October Amount ($)
Budgeted ending inventory	$38,400	$30,000	$37,200
Add: Budgeted cost of goods sold	195,000	192,000	150,000
Cost of available merchandise	$233,400	$222,000	$187,200
Less: Beginning inventory	($39,000)	($38,400)	($30,000)
Budgeted purchases	$194,400	$183,600	$157,200