Question

Four 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 $1.60 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	90,000	120,000	180,000	130,000		100,000

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 72,000 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.

Answer 1

Direct Material Budget
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year	Q1 Year 3
Budgeted Production	90,000	120,000	180,000	130,000	520,000	100,000
Musk Oil per Bottle	4	4	4	4	4	4
Musk Oil required for production	360,000	480,000	720,000	520,000	2,080,000	400,000
Add: Desired Ending Inventory	96,000	144,000	104,000	80,000	80,000
Total Required	456,000	624,000	824,000	600,000	2,160,000
Less: Beginning Inventory	72,000	96,000	144,000	104,000	72,000
Required Purchases	384,000	528,000	680,000	496,000	2,088,000
Cost per Gram	1.60	1.60	1.60	1.60	1.60
Budgeted Cost	614,400	844,800	1,088,000	793,600	3,340,800