This is part three in our Responsibility accounting series. Where we'll be looking at Inventory, purchases, and the Cost of Goods Sold budget. So in
our discussion we're going to combine this, these budgets into one. So instead
of having a separate inventories and purchases and cost of goods sold budgets,
we're gonna have one inventory purchases and cost of goods sold budget as a
combination. So in demonstrating this, I'm going to use our old-fashioned t-account.
So because most of us are familiar with that and we know where things go and we
can see this nice pretty picture as opposed to memorizing this form down
here at the bottom. So we're just going to kind of throw in some things on this
T account that we already know. For example, we know beginning inventory,
inventory's an asset so carries a debit balance. Beginning inventory we would
know because that would come from the prior periods ending inventory. We would
also be able to figure out our cost of goods sold for the next period because
that would be a direct result of our sales budget that we created in the
prior lecture, and of course we would decide what would we want our ending
inventory to be. So how much inventory would we want to have left over at the
end of the period? So once we have these three numbers. So beginning is a given
number, and then of course Cost of Good sold and ending would be estimates. We can
then calculate what purchases would be. So remember beginning plus purchases has
to cover your cost of goods sold plus your ending. Because cost of goods sold
plus ending is that total inventory that's required that must be covered
again by beginning plus purchases. So hopefully that was a good visual for you
of what we're going to be looking at in this section. So look at the form at
the bottom you can see it's basically what we just discussed. We start with our
cost of goods sold, we're going to add our desired ending inventory. So that's
going to give us our total inventory required if you subtract out your
beginning inventory which comes from last periods ending, that's going to give
you the amount that you need to purchase to make that happen. So one thing to
point out before we move on is remember that ending from the prior period is
going to be the next periods beginning inventory. So that's where that comes
from So let's look at a couple of examples
here for this budget. So here we have Grippers and they expect cost of goods
sold to average 65% of sales revenue and the company expects to sell 4300 pairs
of shoes in March for $240 each. So hopefully you have watched the sales
budget lecture prior to this one and this sounds a little bit familiar and I
have the sales budget here in that spreadsheet there for us which we
created in the sales budget lecture. So Grippers target ending inventory is
$10,000 plus 50% of the next month's cost of goods sold. Use this information
in the sales budget you completed in an earlier video lecture, which I've
provided here for you, to prepare Grippers inventory purchases and cost of
good sold budget for January and February and of course I'm using T accounts to do
that. So you'll see I have a January inventory T account and a February
inventory T account. So we're just, again going to fill in the information that we
know. So the first thing is they tell me that cost of goods sold is 65% of
sales revenue. So I can look at my sales budget there and I can find that January
sales revenue is $740,000. So cost of goods sold for
January must be 65% of that. Which comes out to be $481,000.
So next if we move on, let's see, they tell me that ending
inventory is 10,000 plus 50% of next month's cost of goods
sold, but the story doesn't really tell me anything about beginning inventory. So
we have to remember where beginning inventory comes from. Remember beginning
inventory for January we'll be ending inventory from December. So let's use
that statement in the story to calculate December's ending inventory, which is
also equal to January's beginning inventory. So they tell me that ending
inventory is 10,000 plus 50% of the next month's cost of
goods sold. So that means that January's beginning inventory will be $10,000
plus 50% of January's cost of goods sold, which comes to
$250,500. So before we move away from
these two topics let's go and calculate cost of goods sold for February. Again
costs of goods sold is 65% of sales revenue. So if February sales
revenue is $770,000 and 65% of that
would be $500,500. So now they tell me
again that ending inventory is 10,000 plus 50% of next month's
cost of goods sold. So now we can calculate January's ending inventory
because that will be 10,000 plus 50% of February's cost of goods
sold. So ending inventory for January will be $260,250.
Now we can calculate our budgeted purchases for
January, just solving for our unknown. So cost of goods sold plus ending in
January minus beginning, should equal purchases of $490,750.
So again you're just solving for
the unknown. Now if we move over to February's beginning inventory, we know
that January's ending and we've already calculated January's ending so we're
just going to move that over to February's beginning, $260,250,
and now we'll calculate ending for February.
So again ending is 10,000 plus 50% of next month's cost of goods
sold, but we don't have March on here. So we, so to calculate cost of goods sold we
actually have to have sales revenue as well, but they do tell me how much I'm
selling in or expect to sell in March. They tell me it's gonna be
4,300 pairs of shoes at $240 each. So that's
my sales revenue. To get cost of goods sold, it's times 65%. So
ending inventory for February will be that $10,000 plus 50%
of Marches cost of goods sold which is revenue times 65%.
So ending inventory for February will be $250,500
and now we we just solve for our unknown, which is our
purchases for February. So you add your cost of goods sold plus your ending
subtract your beginning, that will give you purchases of $585,650.
Now I want you to try one very
similar to this one, except this one will be Mountaineers so Mountaineers expects
cost of goods sold to average 75% of sales revenue and the
company expects to sell 4,600 pairs of shoes in March for
$240 each. Mountaineers target ending inventories
$18,000 plus 45% of the next month's cost of
goods sold. Use this information in the sales budget prepared in an earlier
online lecture, which I've also provided here, to
prepare Mountaineers inventory purchases and cost of goods sold budget for
January and February and I of course I'm using t-accounts, you don't have to, you
can use the form like you saw in the prior slide or you can use T accounts
here as I'm doing. So press pause on your player now, try to complete this problem
on your own and then come back and we'll discuss it together. Okay great! Hope that
you were able to get through that without any problems.
So let's just go in the same order that we did the first one.
So we'll calculate January's cost of goods sold first. So what you should have
done is taking cost of goods sold for, or sales for January of 660,000
times 75%. That gave us $495,000. The next
thing is to calculate beginning inventory for January. So again now we've
got to calculate ending from December because we're not giving any
information on how to calculate beginning. So we have to go calculate
ending inventory for December and that would be 18,000 plus 45%
of the next month's cost of goods sold which is January's cost of
goods sold, gives me $240,750
for ending inventory in December. Which I just simply move into the January
inventory T account. Now I'm going to move over to cost of goods sold for
February, again it's 75% of sales
revenue which gives us $330,000 and now I can
calculate ending inventory for January because ending inventories $18,000 plus 45%
of next month's cost of goods sold. So that gives
me ending inventory in January of a $166,500.
Now I can calculate my unknown in January which is my purchases.
So if you take your cost of goods sold plus your ending minus your beginning, that
will give you purchases in January of $420,750.
Now we'll complete February's inventory t account.
Beginning inventory from February is again ending
from January, we've already calculated ending for January, so I'm just gonna
move that over to my beginning inventory for February. Now we can calculate ending
for February. Remember, ending inventory is $18,000
plus 45% of next month which is March's cost of goods sold. So we have to
have sales revenue to calculate cost of goods sold. So they tell me that I sold,
that I plan to sell 4,600 pairs of shoes at $240 each. That will be
my sales revenue times 45% will be my cost of goods or times 75%
will be my cost of goods sold and my ending inventory is 18,000 plus 45%
of the cost of goods sold from the next month. So my ending inventory
for February will be $390,600. I
can now solve for the unknown which is purchases. So it would be my cost of
goods sold plus my ending inventory less my beginning, will give me purchases of
$554,100. Thank you for watching
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