Question

Upward Inc. has projected sales to be 10,300 units in January; 12,400 units in February; 8,800 units in March; 10,600 units in April; and 11,800 units in May. There are 860 units on hand on January 1. Management has determined that it needs to carry 4% of the following month’s sales in ending inventory. Assume that each unit requires 4 litres of raw materials. There are 6,300 litres of raw materials on hand at January 1. Management has decided that raw materials ending inventory should be 10% of next month’s production needs. Upward Inc. pays $1.90 per litre for raw materials.

Prepare a raw materials budget for the first quarter, by month and in total. Include quantity of materials to purchase and cost for the purchases.

Answer 1

• All working forms part of the answer
• Working 1: Units to be produced

Working		January	February	March	April
A	Budgeted Sales unit	10,300.00	12,400.00	8,800.00	10,600.00
B = next month's A x 4%	Desired ending Inventory	496.00	352.00	424.00	472.00
C = A+B	Total	10,796.00	12,752.00	9,224.00	11,072.00
D	Beginning Inventory	860.00	496.00	352.00	424.00
E = C - D	Units to be produced	9,936.00	12,256.00	8,872.00	10,648.00

• Working and Answer for Requirement:

Working		January	February	March	Quarter [total]
A [calculated above]	Units to be produced	9,936.00	12,256.00	8,872.00	31,064.00
B	Raw material required per unit	4.00	4.00	4.00	4.00
C=Ax B	Total requirement for production	39,744.00	49,024.00	35,488.00	124,256.00
D = 10% x Next month's C	Desired ending inventory of raw material	4,902.40	3,548.80	4,259.20	4,259.20
E = C + D	Total needs	44,646.40	52,572.80	39,747.20	128,515.20
F	Beginning Inventory of raw material	6,300.00	4,902.40	3,548.80	6,300.00
G = E - F	Raw material to be purchased [litres]	38,346.40	47,670.40	36,198.40	122,215.20
H	Cost of raw material per litre	$                                        1.90	$                     1.90	$                           1.90	$                   1.90
I = G - H	Cost of raw material purchased	$                             72,858.16	$          90,573.76	$                 68,776.96	$      232,208.88