Parts 1 and 2 of this activity are to not only help you understand production and materials purchases budgets but to consider the challenges you might deal with managing these types of budgets and budgets in general.

Part 1:

Miles Manufacturing has prepared the following sales budget for the first four months of the year:

January February March April

Sales 20,00022,000 25,000 21,000

Miles estimates that it will begin the year with 3,000 units in inventory. The company wants to end each month with inventory equal to 25 percent of the next month's projected sales. Prepare a production budget for January through March.

A format of the Production Budget might be:

Expected units to be sold

+ Desired units in ending inventory

= Total units available

- Estimated units in beginning inventory

= Total units to be produced

Part 2:

Prepare a direct materials purchases budget for Miles Manufacturing for January and February, using the information from Part 1 and below.

1. Each unit requires 2 pounds of materials.

2. Materials cost $0.60 per pound.

3. Miles estimates that it will have 4,000 pounds of materials inventory on January 1.

4. Miles' desired ending inventory for materials is 5,000 pounds.

A format of the Direct Materials Purchases Budget might be

Materials required for production

+Desired ending materials inventory

-Estimated beginning materials inventory

= Direct material quantity to be purchased

x Unit price

= Total direct materials purchases

What challenges might you encounter in preparing budgets such as these?