Case Scenario:
Bob is the purchasing manager for regal products. Each year Regal Products develops a master budget. Bob is responsible for preparing a purchasing budget, which he bases on budgeted levels of production. Bob carefully plans purchasing costs and raw material inventory levels to meet product needs.
Each year, Yvonne, president of Regal Products, conducts performance valuations and bonuses are paid to key employees including Bob. For the past two years, Bob has received a very small bonus and has been yelled at by Yvonne for poor planning. Specifically, Yvonne has pointed out that the purchasing department has not maintained adequate levels of raw material inventory and is always in a rush to obtain materials, resulting in increased shipping and handling charges.
Yvonne stated to Bob, “The sales department and production department are doing an excellent job. They consistently exceed their budgets by 10% or more. I just don’t understand why you can’t meet your numbers.
Bob went back and looked at his budget. He knew he had ordered the amount required for the budget. The budget for January and February is as follows:
"Hint: This is an example of what we call variable or flexible budgeting, defined as ""Statement of projected revenue and expenditure based on various levels of production. It shows how costs vary with different rates of output or at different levels of sales volume."" (investopedia.com)
So, when preparing the budget for this, think about COGS changing. Since this is a budget, the best estimate of how COGS would change is the historical relationship it had with sales in the past.
Question 1: If sales level were 10% highter than budgeted, how many pounds of raw materials would Bob need to rush order each month so that he can meet demand and the required ending inventory as shown in the budget?
Question 2: Why does it appear that the purchasing department is having trouble meeting its budget?
Question 3: Is it appropriate to blame Bob for all of the purchasing problems?
Question 4: If Yvonne does “make some changes,” what changes would you suggest she consider?"
|
January |
February |
| Unit sales |
300,000 |
350,000 |
| Add: Desired ending inventory |
35,000 |
25,000 |
| Subtotal |
335,000 |
375,000 |
| Less: Beginning Inventory |
(30,000) |
(35,000) |
| Budgeted production |
305,000 |
340,000 |
| Pounds of raw materials per unit |
1.1 |
1.1 |
| Required pounds of raw materials |
335,500 |
374,000 |
| Add: Desired ending inventory of raw materials |
(37,400) |
(27,500) |
| Less: Beginning Inventory of raw materials |
33,550 |
37,400 |
| Total raw materials need (pounds) |
339,350 |
364,100 |