Question

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

Three 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	66,000	96,000	156,000	106,000		76,000

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 39,600 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

Quarter 1

Opening inventory = 39,600/3 = 13,200 bottles

Closing inventory = 96,000*20% = 19,200

Production = 66,000

Oil required = Production - Opening inventory + Closing inventory

= 66,000 - 13,200 + 19,200

= 72,000 bottles

= 72,000*3

= 216,000 grams

In rupees

= 216,000*1.80

= $388,800

Quarter 2

Opening inventory = 19,200 bottles

Closing inventory = 156,000*20% = 31,200

Production = 96,000

Oil required = Production - Opening inventory + Closing inventory

= 96,000 - 19,200 + 31,200

= 108,000 bottles

= 108,000*3

= 324,000 grams

In rupees

= 324,000*1.80

= $583,200

Total for year 1

= 216,000 + 324,000

= 540,000 grams

In rupees

= 388,800 + 583,200

= $972,000

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