Budgeting Question - Help needed please

sue-broadstairs

I hope someone will be good enough to guide me through a budgeting question, its taken from the BPP Question Bank book and its question 4.3

A business is preparing its production budget for the next quarter.
It will have an opening inventory of 1500 units but wants no closing inventory at the end of the quarter.
Sales are likely to exceed production by 20%.
Which of the following is the production budget for the quarter?
Select from
1500 units
1875 units
7500 units
9000 units

Even when I turn to the answer page I can't make it work :crying:
Many thanks in advance.
Sue

coojee

sue-broadstairs wrote: »

I hope someone will be good enough to guide me through a budgeting question, its taken from the BPP Question Bank book and its question 4.3

A business is preparing its production budget for the next quarter.
It will have an opening inventory of 1500 units but wants no closing inventory at the end of the quarter.
Sales are likely to exceed production by 20%.
Which of the following is the production budget for the quarter?
Select from
1500 units
1875 units
7500 units
9000 units

Even when I turn to the answer page I can't make it work :crying:
Many thanks in advance.
Sue

Not sure how you're meant to work it out but I did it by trial and error.
a) if production is 1500 then sales would be 1500 x 1.2 = 1800. Op inv (1500) + prodn (1500) - sales (1800) = 1200 cl inv. So can't be that one
b) same principles. Sales 2250. 1500 + 1875 - 2250 leaves some stock so can't be that

If you carry on and do this for production of 7500 and 9000 you'll get the right answer.

There probably is a much easier way of doing it though

Nps

The question is basically telling you that the 1500 units in inventory are used for the extra 20% of sales (as there are none left at the end).

So if 20% is 1500, 100% must be 7500, so total sales is 9000 (120%). So your answer is 7500 (remember the question is asking for actual production, not total sales).

sue-broadstairs

Thank you both for replying. Have the battle is understanding what the question is asking of you.
Thank you nps for the explanation. With book in hand and your step by step it now makes sense.
The bit i couldn't work of was that 1500 inventory was 20% of sales, once i had that everything else fell into place. I'm anticipating taking my Budgeting exam before the end of this year. This will leave Financial Performance and the project to complete before the standards change again in 2014. So with a full time job, disabled husband and a family to look after I'm on track :-)

Thanks again for the help.

zaf1987

Hi

I struggled with this initially. i worked mine out similar to above, total sales are opening inventory x 6 = 9000. production is then 9000 - opening inventory = 7500. i found this a strange question.

How are you getting on with budgeting? when is your exam? ive got mine on the 16th October.

sue-broadstairs

Thanks for the reply, I'm really enjoying this unit, although if this type of question comes up in the exam I may be in bother. I haven't booked my exam yet, but allowing for work, a house move and life in general I should be ready to start revising by the end of this month and then take the exam mid/end of November, then just Performance and project to complete next year.

Good luck with your revision and the exam on 19th, hope it goes well.

Sue