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Problem 8 3

By Jacqueline-Perfeito Jun 15, 2015 631 Words
Exercise 8-3 Direct Materials Budget
Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $1.50 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3:

Year 2
Year 3

First
Second
Third
Fourth

First
Budgeted production, in bottles
60,000
90,000
150,000
100,000

70,000

Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 36,000 grams of musk oil will be on hand to start the first quarter of Year 2. Required: Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. At the bottom of your budget, show the amount of purchases for each quarter and for the year in total.

Quarter—Year 2

First
Second
Third
Fourth
Year
Required production in units of finished goods
60,000
90,000
150,000
100,000
400,000
Units of raw materials needed per unit of finished goods
     × 3
      × 3
     × 3
     × 3
     × 3
Units of raw materials needed to meet production
180,000
270,000
450,000
300,000
1,200,000
Add desired units of ending raw materials inventory
  54,000
  90,000
  60,000
  42,000
    42,000
Total units of raw materials needed
234,000
360,000
510,000
342,000
1,242,000
Less units of beginning raw materials inventory
  36,000
  54,000
  90,000
  60,000
    36,000
Units of raw materials to be purchased
198,000
306,000
420,000
282,000
1,206,000
Unit cost of raw materials
× $1.50
× $1.50
× $1.50
× $1.50
× $1.50
Cost of raw materials to purchased
$297,000
$459,000
$630,000
$423,000
$1,809,000

Solution:
First Quarter
Production needs = # of bottles x 3 grams per bottle = 60,000*3 = 180,000 grams Desired ending inventory = Production needs for the next quarter x 0.2 = 90,000*3*0.2 = 54,000 grams Total needs = Production needs + desired ending inventory = 180,000 + 54,000 = 234,000 grams Beginning inventory = Ending inventory of the previous quarter = 36,000 grams Raw Materials to be purchased = Total needs - beginning inventory = 234,000 - 36,000 = 198,000 grams Cost of raw materials to be purchased = Raw materials to be purchased x 150 = 198,000*1,50 = $297,000

Second Quarter
Production needs = # of bottles x 3 grams per bottle = 90,000*3 = 270,000 grams Desired ending inventory = Production needs for the next quarter x 0.2 = 150,000*3*0.2 = 90,000 grams Total needs = Production needs + desired ending inventory = 270,000 + 90,000 = 360,000 grams Beginning inventory = Ending inventory of the previous quarter = 54,000 grams Raw Materials to be purchased = Total needs - beginning inventory = 360,000 - 54,000 = 306,000 grams Cost of raw materials to be purchased = Raw materials to be purchased x 150 = 306,000*1,50 = $459,000

Third Quarter
Production needs = # of bottles x 3 grams per bottle = 150,000*3 = 450,000 grams Desired ending inventory = Production needs for the next quarter x 0.2 = 100,000*3*0.2 = 60,000 grams Total needs = Production needs + desired ending inventory = 450,000 + 60,000 = 510,000 grams Beginning inventory = Ending inventory of the previous quarter = 90,000 grams Raw Materials to be purchased = Total needs - beginning inventory = 510,000 - 90,000 = 420,000 grams Cost of raw materials to be purchased = Raw materials to be purchased x 150 = 420,000*1,50 = $630,000

Fourth Quarter
Production needs = # of bottles x 3 grams per bottle = 100,000*3 = 300,000 grams Desired ending inventory = Production needs for the next quarter x 0.2 = 70,000*3*0.2 = 42,000 grams Total needs = Production needs + desired ending inventory = 300,000 + 42,000 = 342,000 grams Beginning inventory = Ending inventory of the previous quarter = 60,000 grams Raw Materials to be purchased = Total needs - beginning inventory = 342,000 - 60,000 = 282,000 grams Cost of raw materials to be purchased = Raw materials to be purchased x 150 = 282,000*1,50 = $423,000

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