Budgeting Basics and Beyond

6.5. Inventory Purchases, Merchandising Firm

Putnam Company is a manufacturing firm, so it prepares a production budget, as shown in Schedule 2. If the company were a merchandising (retailing or wholesaling) firm, then instead of a production budget, it would develop a merchandise purchase budget showing the amount of goods to be purchased from its suppliers during the period. The merchandise purchases budget is in the same basic format as the production budget, except that it shows goods to be purchased rather than goods to be produced:

Budgeted cost of goods sold (in units or dollars)	$560,000[]
Add: Desired ending merchandise inventory	120,000
Total needs	$680,000
Less: Beginning merchandise inventory	(80,000)
Required purchases (in units or in dollars)[]	$600,000
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^[] Gross profit (margin) = sales − cost of goods sold (or cost of sales). For example, percentagewise, 30% = 100% − 70%. For example, sales is $800,000, then the cost of goods sold is $800,000 × 70% = $560,000

^[] Cost of goods sold = beginning inventory + purchases − ending inventory. Hence, purchases = cost of goods sold + ending inventory − beginning inventory