Question

The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Units to be produced	21,000	24,000	23,000	22,000

In addition, 21,000 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is $8,000.

Each unit requires 4 grams of raw material that costs $1.20 per gram. Management desires to end each quarter with an inventory of raw materials equal to 25% of the following quarter’s production needs. The desired ending inventory for the 4th Quarter is 8,000 grams. Management plans to pay for 60% of raw material purchases in the quarter acquired and 40% in the following quarter. Each unit requires 0.20 direct labor-hours and direct laborers are paid $12.50 per hour.

Required:

1.&2. Calculate the estimated grams of raw material that need to be purchased and the cost of raw material purchases for each quarter and for the year as a whole.

3. Calculate the expected cash disbursements for purchases of materials for each quarter and for the year as a whole.

4. Calculate the estimated direct labor cost for each quarter and for the year as a whole.

Answer 1

Requirement 1.

Direct Materials Budget

Quarter

	1st	2nd	3rd	4th	Year
Requried production in units	21,000	24,000	23,000	22,000	90,000
Grams of raw materials needed per unit	4	4	4	4	4
Gram of raw materials needed to meet production	84,000	96,000	92,000	88,000	360,000
Add: Desired gram of ending raw materials inventory	24,000	23,000	22,000	8,000	8,000
Total grams of raw materials needed	108,000	119,000	114,000	96,000	368,000
Less: Beginning raw materials inventory	21,000*	24,000	23,000	22,000	21,000*
Grams of raw materials to be purchased	87,000	95,000	91,000	74,000	347,000
Cost of raw materials per gram	$1.20	$1.20	$1.20	$1.20	$1.20
Cost of raw materials to be purchased	$104,400	$114,000	$109,200	$88,800	$416,400

25% of the next quarter's production needs. For example, the second-quarter production needs are 96,000 grams. Therefore, the desired ending inventory for the first quarter would be 24,000 grams (96,000 25%).

Requirement 2.

Schedule of Expected Cash Disbursements for purchases of Materials

	1st	2nd	3rd	4th	Year
Beginning accounts payable	$8,000				$8,000
First quarter purchases	62,640	$41,760			104,400
Second quarter purchases		68,400	$45,600		114,000
Third quarter purchases			65,520	$43,680	109,200
Fourth quarter purchases				53,280	53,280
Total cash disbursements for materials	$70,640	$110,160	$111,120	$96,960	388,880

Beginning accounts payable $8000, cash payments for the last year's fourth-quarter purchases.

$62,640 ($104,400 60%); $41,760 ($104,400 40%)

$68,400 ($114,000 60%); $45,600 ($114,000 40%)

$65,520 ($109,200 60%); $43,680 ($109,200 40%)

$53,280 ($88,800 60%)

Requirement 3.

Direct Labor Budget

	1st	2nd	3rd	4th	Year
Required production	21,000	24,000	23,000	22,000	90,000
Direct labor hours per unit	0.20	0.20	0.20	0.20	0.20
Total direct labor-hours needed	4,200	4,800	4,600	4,400	18,000
Direct labor cost per hour	$12.50	$12.50	$12.50	$12.50	$12.50
Total direct labor cost	$52,500	$60,000	$57,500	$55,000	225,000