Question

Rensing Ltd. estimates sales for the second quarter of 2017 will be as follows. Month Units April 2,530 May 2,420 June 2,310 The target ending inventory of finished products is as follows. March 31 2,050 April 30 2,300 May 31 2,100 June 30 2,300 2 units of material are required for each unit of finished product. Production for July is estimated at 2,710 units to start building inventory for the fall sales period. Rensing’s policy is to have an inventory of raw materials at the end of each month equal to 60% of the following month’s production requirements. Raw materials are expected to cost $7 per unit throughout the period. Calculate the May raw materials purchases in dollars. Raw material purchases cost $

Answer 1

Please note n/a = Not applicable

Solution:

Details provided in question for finished goods:

Finished goods	March	April	May	June	July
Sales	-	2,530	2,420	2,310	n/a
Target closing inventory	2,050	2,300	2,100	2,300	n/a
Production unit	-	?	?	?	2,710

Step 1: Computation of production unit of finished goods

Note for student: Please note: the following equation has been used to arrive at the production units.

Opening stock + Production - Sales = Closing stock

Finished goods	Ref. No.	March	April	May	June	Explanation
Sales	A	n/a	2,530	2,420	2,310	Information provided in question
Add: Target closing inventory	B	2,050	2,300	2,100	2,300	Information provided in question
Less: Opening inventory	C	n/a	2,050	2,300	2,100	Closing inventory of previous month
Production unit	D = (A + B) - C	n/a	2,780	2,220	2,510

Step 2: computation of raw materials purchased

Note for student: Please note: the following equation has been used to arrive at the purchase units.

Opening stock + Purchase - Production = Closing stock

Raw materials	Ref. No.	March	April	May	June	July	Explanation
Production requirement	E = D X 2	n/a	5,560	4,440	5,020	5,420 [2,710X2]	2 units of raw material are required for 1 unit of finished goods; hence multiply production units by 2
Closing inventory	F = 60% of E of next month's production unit	3,336	2,664	3,012	3,252	n/a	As per the Raw material policy, Closing raw material of current month = 60% of following months requirement
Opening inventory	G	n/a	3,336	2,664	3,012	3,252	Closing inventory of previous month
Purchases units	D = (E + F) - G	n/a	4,888	4,788	5,260
Raw material cost @ $7 per unit		n/a	$34,216	$33,516	$36,820		As per question, Raw materials are expected to cost $7 per unit throughout the period

Therefore, the cost of raw material for May is $33,516.