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Cash Purchase Budget & Inventory Purchase

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A company has adopted the following policies regarding merchandise purchases
and inventory. At the end of any month, the inventory should be $18,500 plus 80% of the cost
of goods to be sold during the following month. The cost of merchandise sold averages 75%
of sales. Purchase terms are generally net 30 days. A given month's purchases are paid as
follows: 35% during that month and 65% during the following month.
Purchases in May had been $160,000 and the inventory on May 31 was higher than planned at
$220,000. The manager was upset because the inventory was too high. Sales are expected to
be June, $320,000; July, $305,000; August, $340,000; and September, $400,000.
(1) Compute the amount by which the inventory on May 31 exceeded the company's policies.
(2) Prepare budget schedules for June, July, and August for purchases and for disbursements
for purchases.

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Solution Summary

The solution computes the purchase made in a month and monthly cash payment made for the purchases.

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Please review the attached sheet.

Ans 1 The Inventory exceeds by $9500 (220000-210500) as per company policies.

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