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 $1.60 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	90,000	120,000	180,000	130,000		100,000

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 72,000 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	90000	120000	180000	130000	520000
Units of Raw material needed per Unit of Fished Goods	4	4	4	4	4
Units of Raw material needed to meet Production	360000	480000	720000	520000	2080000
Desired Ending Inventory of Raw Material	96000	144000	104000	80000*	80000
Total Units of Raw material Needed	456000	624000	824000	600000	2160000
Beginning Inventory of Raw Material Available	72000	96000	144000	104000	72000
Units of Raw material to be Purchased	384000	528000	680000	496000	2088000
Unit cost of Raw Material	$                   1.60	$                     1.60	$                      1.60	$                   1.60	$                   1.60
Cost of Raw Material to be Purchased	$ 614,400	$ 844,800	$ 1,088,000	$ 793,600	$ 3,340,800

*Ending inventory of quarter 4= 100000 x 4 x 20%