Let's prepare a detailed step-by-step production budget for November for Forrest Company:
1. Determine the required ending inventory for November:
The company's policy is that the ending inventory should be 20% of the next month's budgeted sales.
- December's budgeted sales are 400,000 units.
- Thus, the ending inventory for November should be 20% of 400,000 units.
[tex]\[
\text{Ending Inventory for November} = 0.20 \times 400,000 = 80,000 \text{ units}
\][/tex]
2. Identify the beginning inventory for November:
The ending inventory for October becomes the beginning inventory for November.
- Given: October's ending inventory = 90,000 units.
[tex]\[
\text{Beginning Inventory for November} = 90,000 \text{ units}
\][/tex]
3. Calculate the units required for production in November:
The formula to calculate the required production is:
[tex]\[
\text{Required Production} = (\text{November Sales Budget} + \text{Ending Inventory for November}) - \text{Beginning Inventory for November}
\][/tex]
- November's budgeted sales = 450,000 units.
- Beginning inventory for November = 90,000 units.
- Ending inventory for November = 80,000 units.
[tex]\[
\text{Required Production for November} = (450,000 + 80,000) - 90,000
\][/tex]
[tex]\[
\text{Required Production for November} = 530,000 - 90,000 = 440,000 \text{ units}
\][/tex]
Given the above calculations, the production budget for November can be summarized in a tabular form:
[tex]\[
\begin{array}{|l|l|}
\hline
\text{FORREST COMPANY} \\
\text{Production Budget} \\
\hline
& \text{November} \\
\hline
\text{Budgeted Sales} & 450,000 \text{ units} \\
\text{Add: Desired Ending Inventory} & 80,000 \text{ units} \\
& \text{(20% of December's Sales of 400,000 units)} \\
\hline
\text{Total Required Units} & 530,000 \text{ units} \\
\text{Less: Beginning Inventory} & 90,000 \text{ units} \\
\hline
\text{Units to be Produced} & 440,000 \text{ units} \\
\hline
\end{array}
\][/tex]
This table shows that Forrest Company needs to produce 440,000 units in November.
