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 $2.10 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	98,000	128,000	188,000	138,000		108,000

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 78,400 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 materials budget for musk oil
	Quarter
First	Second	Third	Fourth	Year
Required Production ( units of finished goods)	98000	128000	188000	138000	552000
Raw material needed (per unit )	4	4	4	4	4
Raw material needed to Production (units)	392000	512000	752000	552000	2208000
Closing Inventory of raw material (Desired )	102400	150400	110400	86400	86400
Total units of raw material	494400	662400	862400	638400	2294400
Less : Opening Inventory of raw material	78400	102400	150400	110400	78400
Raw material Purchased (units )	416000	560000	712000	528000	2216000
Cost of raw material (per units)	$                 2.10	$                     2.10	$                     2.10	$                     2.10	$                     2.10
Cost of raw material Purchased	$        873,600	$        1,176,000	$        1,495,200	$        1,108,800	$        4,653,600

working notes:-

First quarter closing inventory = 512000 *20% = 102400

Fourth quarter closing inventory = 108000 * 80% = 86400

Opening inventory of raw material first quarter is given = 78200

One quarter closing inventory next quarter opening inventory