Question

Exercise 8-3 Direct Materials Budget [LO8-4]

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 $1.80 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	94,000	124,000	184,000	134,000		104,000

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 75,200 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

Solution

Mink Caress
Direct Materials Budget
	Quarter
	First	Second	Third	Forth	Year
Required Production in Units of Finished Goods	94000	124000	184000	134000	536000
Units of Raw material needed per Unit of Fished Goods	4	4	4	4	4
Units of Raw material needed to meet Production	376000	496000	736000	536000	2144000
Desired Ending Inventory of Raw Material	99200	147200	107200	83200	83200
Total Units of Raw material Needed	475200	643200	843200	619200	2227200
Beginning Inventory of Raw Material Available	75200	99200	147200	107200	75200
Units of Raw material to be Purchased	400000	544000	696000	512000	2152000
Unit cost of Raw Material	$                   1.80	$                     1.80	$                      1.80	$                   1.80	$                   1.80
Cost of Raw Material to be Purchased	$ 720,000	$ 979,200	$ 1,252,800	$ 921,600	$ 3,873,600

.Working

Required Production in Units of Finished Goods (Quarter 1 Year 3)	104000
Units of Raw material needed per Unit of Fished Goods (Quarter 1 Year 3)	4
Units of Raw material needed to meet Production (Quarter 1 Year 3)	416000
Clsosing Raw material for forth quatrer (416000*20%)	83200