Question

Miami Company makes and sells a single product. It requires
4 pounds of direct materials to produce one unit of this
product. Budgeted units to be produced for the next four
months is given below:

                  Budgeted Units to be Produced            
July                      ?????? units
August                    17,000 units
September                 44,000 units
October                   28,000 units

The company wants to maintain monthly ending inventories of
direct materials equal to 28% of the next month's production
needs. The cost of direct materials is $3.25 per pound.

Assume Miami Company pays for 80% of a month's purchase of
direct materials in the month of purchase and the other 20%
is paid in the following month.

Calculate the budgeted cash payments for direct materials in
September.

Answer 1

Solution :

Cash Payment in September :

Payment for August Purchases : = $ 319,280 * 20% = $ 63,856

Payment for September Purchases : = $ 513,760 * 80% = $ 411,008

Total Payment to be made in September = $ 474,864

Working :

	August	September
(a) Budgeted Production	17,000	44,000
(b) Direct Material Required in Production	17,000 * 4 = 68,000	44,000 * 4 = 176,000
(c) Closing Direct Material required at the end of the month	176,000 * 28% = 49,280	28,000 * 4 * 28% = 31,360
(d) Total Direct Material Required (b+c)	117,280	207,360
(e) Opening Inventory	68,000 * 28% = 19,040	49,280
(f) Direct Material Purchased (d-e)	98,240	158,080
(g) Direct Material Cost Per Unit	$ 3.25	$ 3.25
(h) Total Cost of Purchases (f *g)	$ 319,280	$ 513,760

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