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 $1.70 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	92,000	122,000	182,000	132,000		102,000

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 73,600 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

	Year 1				Year 2
Quarter	First	Second	Third	Fourth	First
Budgeted Production	92000	122000	182000	132000	102000
Musk Oil Required for production in grams (4grms/bottle)	368000	488000	728000	528000	408000
Closing inventory	97600	145600	105600	81600	0
Opening Inventory	73600	97600	145600	105600	81600
Inventory to be purchase	392000	536000	688000	504000	326400
Cost of Musk oil per gram	$        1.70	$        1.70	$            1.70	$        1.70	$        1.70
Total Purchase cost will be	$ 666,400	$ 911,200	$ 1,169,600	$ 856,800	$ 554,880

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