University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

249

Pages:

2
Author:

stud_ice13

Merchandise Purchases Budget for a Merchandising Company In the context of a merchandising company, the merchandise purchases budget outlines the amount of inventory the company needs to purchase during a specific period to meet sales demands while maintaining desired inventory levels. The process is similar to production budgeting in manufacturing, but instead of accounting for raw materials and production stages, the focus is on units of merchandise to be purchased from suppliers. Steps to Prepare a Merchandise Purchases Budget: 1. Budgeted Sales (Units): Determine the number of units you plan to sell in each period. 2. Desired Ending Inventory: Set your desired ending inventory, usually based on a percentage of next month's sales (e.g., 60% of next month’s sales units). 3. Beginning Inventory: This is the inventory available at the beginning of the period. 4. Units to be Purchased: This is calculated using the formula: Units to Purchase=(Budgeted Sales+Desired Ending Inventory)−Beginning I nventory 5. Cost per Unit: Multiply the units to purchase by the cost per unit to get the total merchandise cost. Example: Merchandise Purchases Budget for July Assumptions: • • • • • Budgeted sales for July: 120 units. Budgeted sales for August: 140 units. Desired ending inventory for July: 60% of August sales (60% × 140 = 84 units). Beginning inventory on July 1: 72 units (from June 30 inventory). Merchandise cost per unit: $50. Merchandise Purchases Budget for July Details Units 120 Budgeted sales for July Add: Desired ending inventory 84 204 Total needs Details Less: Beginning inventory Units to purchase • Units 72 132 Cost of merchandise purchases = 132 units × $50 = $6,600. Schedule of Cash Payments for Merchandise Purchases Let's assume the company pays 40% of its purchases in the same month and 60% in the following month. For the cash budget, the cash payments for purchases would be split across months based on this policy. For example: • • Cash payment for July purchases = 40% × $6,600 = $2,640 (paid in July). The remaining 60% (i.e., $3,960) will be paid in August. If there were unpaid purchases from June carried forward (e.g., $50,000 in purchases), the payment schedule for July would reflect both the unpaid portion of June’s purchases and the portion of July’s purchases. Conclusion: The merchandise purchases budget helps plan for inventory acquisition based on sales projections and inventory policies. It ensures the company has enough inventory to meet demand while minimizing excess stock, and it also plays a crucial role in cash flow planning by outlining expected payments for inventory purchases across periods.