Question

Crane Ltd. estimates sales for the second quarter of 2020 will be as follows.

Month		Units
April		2,590
May		2,420
June		2,350

The target ending inventory of finished products is as follows.

March 31		2,030
April 30		2,200
May 31		2,150
June 30		2,390

2 units of material are required for each unit of finished product. Production for July is estimated at 2,630 units to start building inventory for the fall sales period. Crane’s policy is to have an inventory of raw materials at the end of each month equal to 70% of the following month’s production requirements.

Raw materials are expected to cost $5 per unit throughout the period.

Calculate the May raw materials purchases in dollars.

Raw material purchases cost

$

Answer 1

Raw material purchases cost = $25,240

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Direct Material Budget for the month of May
	April	May	June
Finished goods to be produced                                           [Refer working note 1]              (a)	2,760	2,370	2,590
Raw materials (units) needed per unit of finished good                                                       (b)	2	2	2
Raw materials needed for production                                                                                  (a x b)	5,520	4,740	5,180
Plus: Desired raw materials in ending inventory             [Refer working note 2]	3,318	3,626
Total direct materials needed		8,366
Less: Raw materials in beginning inventory                   [Refer working note 3]		3,318
Budgeted purchases of direct materials                                                                                 (c)		5,048
Raw materials cost per unit                                                                                                   (d)		5
Raw materials purchase cost                                                                                             (c x d)		25,240

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Working note 1 - Production Budget
	April	May	June
Expected units sales	2,590	2,420	2,350
Add: Targeted ending inventory of finished products	2,200	2,150	2,390
Total units needed	4,790	4,570	4,740
Less: Beginning finished goods units    [Refer working note 3]	2,030	2,200	2,150
Finished good units to be produced	2,760	2,370	2,590

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Working Note 2 - Calculation of desired ending inventory of raw material at the end of each month
For April                 [Raw materials needed for production during May x 40% = 4,740 x 70%]	3,318	units
For May                   [Direct materials needed for production for the June x 40% = 5,190 x 70%]	3,626	units
Working note 3 - Beginning inventory for each month = Ending inventory for the immediate previous month