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	5,000	8,000	7,000	6,000

In addition, 6,000 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 $2,880.

Each unit requires 8 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 $11.50 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. Assume that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the estimated number of units produced.

Answer 1

1) Calculation of raw material purchased
Particulars				1st Qtr	2nd Qtr	3rd Qtr	4th qtr
Unit to be produced (a)				5000	8000	7000	6000
Total raw material required (a)*8				40000	64000	56000	48000
Add: Raw material closing stock @25%				16000	14000	12000	8000
total Raw material available				56000	78000	68000	56000
less: opening stock of raw material***				6000	16000	14000	12000
estimated grams of raw material to be purchased				50000	62000	54000	44000
Raw material cost per gram				1.2	1.2	1.2	1.2
Cost of raw material to be purchased				60000	74400	64800	52800
2) Calculation of cash disburesements for purchases of material for each quarter
Particulars				1st Qtr	2nd Qtr	3rd Qtr	4th qtr
beginning accounts payable				2880
1st qaurter purchase (60000*60%),(60000*40%)				36000	24000	0	0
2nd quarter purchase (74400*60%),(74400*40%)					44640	29760	0
3rd qaurter purchase (64800*60%),(64800*40%)						38880	25920
4th quarter purchase (52800*60%)							31680
				38880	68640	68640	57600
3) Calculation of total direct labour cost
Particulars				1st Qtr	2nd Qtr	3rd Qtr	4th qtr
Unit to be produced (a)				5000	8000	7000	6000
Direct labor hour p.u				0.2	0.2	0.2	0.2
direct labor hour needed				1000	1600	1400	1200
Direct labor cost per hour				11.5	11.5	11.5	11.5
Total direct labor cost				11500	18400	16100	13800
*** Closing stock of raw material will be previous quarter of closing stock