Question 1

How does the budgeting process work in a merchandising company?

Accepted Answer

Budgeting for a merchandising company begins with the sales budget because expected sales provide the basis for the remaining plans. The overall set includes merchandise purchases, operating expenses, cash, and a budgeted income statement. This sequence connects demand expectations with inventory, spending, cash requirements, and projected financial results.

Question 2

How is a merchandise purchases budget calculated?

Accepted Answer

A merchandise purchases budget is calculated by adding the desired ending inventory to cost of goods sold and subtracting beginning inventory. For Lima Tech, cost of goods sold is $210,000, desired ending inventory is $67,200, and beginning inventory is $63,000. Therefore, planned merchandise purchases equal $214,200 for July.

Question 3

Why is the merchandise purchases budget important for inventory planning?

Accepted Answer

The merchandise purchases budget helps a company maintain enough inventory to meet expected sales without accumulating unnecessary stock. Appropriate inventory levels reduce the risk of shortages that could cause lost sales and limit the costs associated with holding excess inventory. The budget also helps managers anticipate cash requirements for inventory purchases.

Question 4

How do merchandising budgets differ from manufacturing budgets?

Accepted Answer

Merchandising companies purchase finished goods from suppliers and sell them directly, so they do not prepare production, direct materials, direct labor, or manufacturing overhead budgets. Manufacturing companies convert raw materials into finished goods and prepare those production-related plans. In merchandising, the merchandise purchases budget replaces these manufacturing-related budgets for planning inventory available for resale.

Question 5

What budgets are included in a merchandising company’s master budget?

Accepted Answer

A merchandising company’s master budget includes the sales budget, merchandise purchases budget, operating expense budget, cash budget, and budgeted income statement. These components address expected revenue, inventory purchases, operating costs, cash needs, and projected financial performance. The sales budget is prepared first and provides the foundation for the other budget components.

Question 6

How does expected sales affect merchandise purchases planning?

Accepted Answer

Expected sales determine the amount of inventory a merchandising company needs to support customer demand. Lima Tech forecasts July sales of $300,000 and estimates cost of goods sold at 70% of sales, or $210,000. The company then adjusts this amount for beginning and desired ending inventory to determine the merchandise purchases needed.

Question 7

How can a merchandise purchases budget support business operations?

Accepted Answer

A merchandise purchases budget supports business operations by coordinating inventory needs with expected sales and available cash resources. It helps managers forecast cash requirements for purchases and negotiate favorable purchasing terms with suppliers. By aligning purchases with sales, the budget contributes to more accurate financial planning and more efficient inventory management.

Budgeting in Merchandising Companies

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