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Exercise 8-3 Direct Materials Budget [LO8-4] Four grams of musk oil are required for each bottle...

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Accounting

Exercise 8-3 Direct Materials Budget [LO8-4]

Four grams of musk oil are required for each bottle of MinkCaress, a very popular perfume made by a small company in westernSiberia. The cost of the musk oil is $1.80 per gram. Budgetedproduction of Mink Caress is given below by quarters for Year 2 andfor the first quarter of Year 3:

Year 2Year 3
FirstSecondThirdFourthFirst
Budgeted production, in bottles94,000124,000184,000134,000104,000

Musk oil has become so popular as a perfume ingredient that ithas become necessary to carry large inventories as a precautionagainst stock-outs. For this reason, the inventory of musk oil atthe end of a quarter must be equal to 20% of the followingquarter’s production needs. Some 75,200 grams of musk oil will beon hand to start the first quarter of Year 2.

Required:

Prepare a direct materials budget for musk oil, by quarter andin total, for Year 2.

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Solution

Mink Caress
Direct Materials Budget
Quarter
First Second Third Forth Year
Required Production in Units of Finished Goods 94000 124000 184000 134000 536000
Units of Raw material needed per Unit of Fished Goods 4 4 4 4 4
Units of Raw material needed to meet Production 376000 496000 736000 536000 2144000
Desired Ending Inventory of Raw Material 99200 147200 107200 83200 83200
Total Units of Raw material Needed 475200 643200 843200 619200 2227200
Beginning Inventory of Raw Material Available 75200 99200 147200 107200 75200
Units of Raw material to be Purchased 400000 544000 696000 512000 2152000
Unit cost of Raw Material $                   1.80 $                     1.80 $                      1.80 $                   1.80 $                   1.80
Cost of Raw Material to be Purchased $ 720,000 $ 979,200 $ 1,252,800 $ 921,600 $ 3,873,600

.Working

Required Production in Units of Finished Goods (Quarter 1 Year 3) 104000
Units of Raw material needed per Unit of Fished Goods (Quarter 1 Year 3) 4
Units of Raw material needed to meet Production (Quarter 1 Year 3) 416000
Clsosing Raw material for forth quatrer (416000*20%) 83200

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