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 $1.50 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	88,000	118,000	178,000	128,000	98,00

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 70,400 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

Concepts and reason

Budgeting: Budgeting is a management accounting process. Various activities are performed to prepare a budget. Under the process of budgeting, budgets are prepared which act as a tool for decision making. Budgets are used by the management for taking various vital decisions.

Budgeting is an important process for any business. It aids coordination amongst various departments of an entity. Budgeting is important for tracking and improving performance of an entity. Under the process of budgeting the first and foremost budget that is created is a sales budget.

In course of ordinary business, the process of budgeting includes:

• Estimating the future sales level

• Estimating the cash inflows and outflows in future

• Estimating the future day to day operations of the business entity

• Incorporating estimates made into the financial statements

Fundamentals

Budget: A quantitative financial plan for a period of time. It is prepared for future accounting periods. A budget is revised and modified on regular basis based upon the actual circumstances.

Master Budget: The combination of all budgets at various functional level is known as master budget. Master budget is usually prepared for the entire year. A master budget forms to be a very important management tool as it is used for evaluating the performance of various responsibility centers.

Sales Budget: The most important component of a master budget. A sales budget estimates the sales for a defined period in units as well in value. A sales budget is prepared after considering various economic conditions, past performances, activity level, production capacity of the entity etc.

Direct material purchase budget: Direct material purchase budget considers the inventory in the beginning of the period and the inventory at the end of the period to calculate the amount of direct material purchases for production purpose.

Calculate the units of raw material needed to meet production as follows:

Calculate desired units of ending raw materials inventory and units of beginning raw materials inventory as follows:

Prepare direct materials budget as follows:

Thus, total cost of raw materials to be purchased for the year is $3,084,000.

Ans:

Total cost of raw materials to be purchased for the year is $3,084,000.