Question

exercise 8-3

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 $160 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 Second ThirdFourth 120,000 180,000 130,000 Year 3 First First 90,000 Budgeted production, in bottles 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 oll 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. (Round "Unit cost of raw materials" answers to 2 decimal places.) Mink Caress Direct Materials Budget - Year 2 Mink Caress __ First Second Third Third Fourth Fourth Units of raw materials needed per unit of finished goods Units of raw materials needed to meet production Total units of raw materials needed 1 / / / 11 / Units of raw materials to be purchased Unt cost of raw materials Cost of raw materials to purchased EL / / 7

Answer 1

Mink Caress
Direct Materials Budget - Year 2
	Quarter
	First	Second	Third	Fourth	Year
Required production in units of finished goods                              (a)	90,000	120,000	180,000	130,000	520,000
Units of raw materials needed per unit of finished goods               (b)	4	4	4	4	4
Units of raw materials needed to meet production                          (a x b)	360,000	480,000	720,000	520,000	2,080,000
Add: Desired units of ending raw materials inventory                   [Refer working note 1]	96,000	144,000	104,000	80,000	424,000
Total units of raw materials needed	456,000	624,000	824,000	600,000	2,504,000
Less: Units of beginning raw materials inventory        [Refer working note 2]	72,000	96,000	144,000	104,000	416,000
Units of raw materials to be purchased                                          (c)	384,000	528,000	680,000	496,000	2,088,000
Unit cost of raw materials                                                             (d)	$1.60	$1.60	$1.60	$1.60	$1.60
Cost of raw materials to be purchased                                       (c x d)	$614,400	$844,800	$1,088,000	$793,600	$3,340,800

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Working note 1 - Computation of ending raw material inventory for each quarter
	Year 2				Year 3
	First-quarter	Second-quarter	Third-quarter	Fourth-quarter	First-quarter
Required production in units of finished goods                              (a)	90,000	120,000	180,000	130,000	100,000
Units of raw materials needed per unit of finished goods               (b)	4	4	4	4	4
Production needs                                                                            (a x b)	360,000	480,000	720,000	520,000	400,000
Desired units of ending raw materials inventory = 20% of the following quarter's production needs
For first quarter = Second quarter's production needs x 20% = 480,000 x 20%	96,000
For second quarter = Third quarter's production needs x 20% = 720,000 x 20%		144,000
For third quarter = Fourth quarter's production needs x 20% = 520,000 x 20%			104,000
For fourth quarter = Year 3's first quarter's production needs x 20% = 400,000 x 20%				80,000

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Working Note 2 - Beginning inventory for each quarter
Note: Ending raw materials inventory quantity for a quarter would become beginning raw materials inventory quantity for the following quarter
For 1st quarter                   [Mentioned in the question]	72,000	units
For 2nd quarter                     [Ending inventory of 1st quarter]	96,000	units
For 3rd quarter                     [Ending inventory of 2nd quarter]	144,000	units
For 4th quarter                     [Ending inventory of 3nd quarter]	104,000	units