Problem
Sales for the 4 quarters of 2013 are expected to be $648,000, $589,000, $604,000, and $750,000, for an annual total of $2,591,000.
Cost of goods sold averages 39% of sales. Ending inventory for each quarter should be 15% of cost of goods sold for the following quarter. Inventory at January 1 is expected to be $75,000.
Required:
a. Show calculations for ending inventory, purchases, and cost of goods sold for the first 3 quarters of 2017.
b. Briefly describe the potential advantages of the top-down budgeting approach in use at this time. What risks, if any, does the company face because of this strategy?