Budgeting; material usage v material purchase

guinea pig

Good morning all,
I'm confused over a Green Light question;
Insert the correct amount into the sentence.
The sales budget is for 25,000 units in the period. The opening inventory is 5,000 units and the closing inventory is 5,500 units. Each unit requires 2 metres of material. The material usage budget for the period is how many metres?
I answered 50,000 metres, 25,000 x 2, as this is how much will be USED.

However, their answer is 51,000 metres, taking into account the opening inventory is 5,000 units and the closing inventory is 5,500 units. Each unit requires 2 metres of material. The material usage budget for the period is 51,000 metres.
I think 51,000 is the amount that needs to be PURCHASED and would appear in the materials purchase budget?

Can anyone clarify please? I'm probably having a senior moment......
Many thanks,
GP

Jo Clark

Morning GP

Right the way I worked this is as follows:-

Sales budget is 25,000 units.

You have Opening Inventory of 5,000 units and Closing Inventory needs to be 5,500 units.

Therefore, 25,000 less opening stock of 5,000 plus closing stock of 5,500 = 25,500 units

You need to calculate material usage for 25,500 units, so 25,500 units x 2 metres = 51,000 metres

The difference is the closing stock being 500 units more than opening stock, so although your sales budget is for 25,000, you need materials for 25,500 i.e. Sales (25,000) less Opening Stock (5,000) = 20,000 plus Closing Stock (5,500) = 25,500 units

Hope this makes sense.

All the best.


JC

guinea pig

Thanks Jo,
Of course it is! I can see it now, but was having a mental block earlier, working on the sales budget, when it needs to be based on the production budget, I will remember this now!
Many thanks again,
GP