## Ending Inventory Budget - Part 1

PART 1  -  The Ending Inventory Budget for a Retailer

Below depicts the formula a retailer would use to calculate its Ending Inventory in Units and in Dollars.

 Beginning Inventory (in units) XXX Add: Units Purchased During the Year XXX Less: Units Sold During the Year (XXX) Equals: the Number of Units in Ending Inventory XXX Multiply: the Cost Per Unit (or weighted average product cost) \$X.XX Equals Ending Inventory in Dollars \$XXX

In order for you to better understand the formula, lets develop the 200X Ending Inventory Budget for Murray's Scholarship Business. Please Note: Murray would use the above formula because he is considered a retailer (IE retailer of information). In other words, Murray only buys finished products or diskettes; He does not make or manufacture them.

As the formula implies, the first piece of information we need is Murray's Beginning Inventory in Units. Since 200X will be his first year of operation, Murray does NOT have any beginning inventory. Therefore, his Beginning Inventory in Units is Zero (0 diskettes). The second item needed in the formula is the number of units Murray plans to purchase during 200X. Recall from Budget 3 entitled "Developing Your Purchase Budget", that Murray determined he would purchase a total of 4,864 diskettes from his supplier in 200X. The third item needed in the formula is the number of units or diskettes Murray estimates (forecasts) to sell during 200X. Recall from Budget 2 entitled "Developing Your Sales Budget" that Murray intends to sell 4,000 diskettes during 200X.

The final piece of information required is Murray's cost to purchase each unit (cost per diskette) from his supplier in 200X. Recall from Budget 1 entitled "Determining your Selling Price and Your Product Cost (per unit)", that Murray's supplier will charge him \$3.00 for each diskette made in 200X. Please note: if Murray planned to sell more than one type of product, he would be required to calculate a weighted average product cost and use that value in the formula.

As you can see, the information needed to develop Murray's Ending Inventory Budget has already been created in his Purchase Budget, in his Sales Budget, and in his Selling Price and Product Cost Budget. Now lets "plug" the figure into the formula to determine Murray's Forecasted Ending Inventory for 200X.

 Beginning Inventory of diskettes 0 diskettes Add: Forecasted Diskettes to be Purchased During the Year 4,864 diskettes Less: Forecasted Diskettes to be Sold During the Year (4,000) diskettes Equals: the Number of Diskettes in Ending Inventory 864 diskettes Multiply: the Cost to Purchase each Diskette \$3.00 Equals: Ending Inventory in Dollars (864 x \$3.00) \$2,592

As you can see, the value of Murray's Forecasted Ending Inventory (in dollars) on December 31, 200X, is \$2,592. This Ending Inventory amount will appear on his December 31, 200X Forecasted Balance Sheet as a Current Asset. Now lets calculate Murray's Ending Inventory for December 31, 200Y.

Once again, the first piece of information we need is Murray's Beginning Inventory in Units. Since the ending inventory in units of one business year becomes the beginning inventory of the following business year, Murray's beginning inventory (in units) on January 1, 200Y will be his ending inventory in units on December 31, 200X. Therefore, Murray's beginning inventory on January 1, 200Y, is 864 (see ending inventory in units on December 31, 200X above). The second item needed in the formula is the number of Units or finished products Murray plans to purchase during 200Y. Once again, recall from Budget 3 entitled "Developing Your Purchase Budget", that Murray determined he would purchase 8,216 diskettes from his supplier during 200Y. The third item needed in the formula is the number of units or diskettes Murray estimates (forecasts) to sell during 200Y. Recall from Budget 2 entitled "Developing Your Sales Budget" that Murray plans to sell 8,000 diskettes during 200Y. The final piece of information required, is Murray's cost to purchase each finished diskette from his supplier in 200Y. Recall from Budget 1 entitled "Determining your Selling Price and Your Product Cost (per unit)", that Murray anticipates each diskette will cost him \$3.30 in 200Y.

Using the information from above and by using the formula, Murray can now calculate his Ending Inventory Budget for 200Y.

 Beginning Inventory of diskettes 864 diskettes Add: Forecasted Diskettes to be Purchased During the Year 8,216 diskettes Less: Forecasted Diskettes to be Sold During the Year (8,000) diskettes Equals: the Number of Diskettes in Ending Inventory 1,080 diskettes Multiply: the Cost to Purchase each Diskette \$3.30 Equals:  Ending Inventory in Dollars (1,080 x \$3.30) \$3,564

As you can see, the value of Murray's Forecasted Ending Inventory (in dollars) on December 31, 200Y is \$3,564. This Ending Inventory amount will appear on his December 31, 200Y Forecasted Balance Sheet as a Current Asset.

Murray's Ending Inventory Budget on December 31, 200X and on December 31, 200Y can be summarized in the following manner.

 ENDING INVENTORY BUDGET For Years Ending December 31, 200X and 200Y 200X 200Y Ending Inventory In Units 864 1080 Cost to Purchase each unit \$3.00 \$3.30 Ending Inventory in Dollars \$2,592 \$3,564

Categories: Forecasting