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Hello John,
Can you explain the workings of the below question please?A Company manufactures a single product. Budgeted production for the first 3 months of next year is as follows;
Month 1 – 8000 units
Month 2 – 9000 Units
Month 3 – 7000 units
Each unit uses 4kg of raw material costing 5kg. The budgeted raw material inventory at the end of each month is to be 20% of the following month’s production
What are the budgeted raw material purchase for month 2 of next year (in $)?
Answer : 172,000Inventory at the end of month 1 / start of month 2 = 20% x 9,000 x 4kg = 7,200 kg
Inventory at the end of month 2 = 20% x 7,000 x 4kg = 5,600 kg
The material needed for production in month 2 = 9,000 x 4kg = 36,000 kg
Therefore the purchases in month 2 will be 36,000 – 7,200 + 5,600 = 34,400 kg
At $5 per kg, the budgeted purchases will be $172,000
(The free lectures on budgeting will help you. Our free lectures are a complete course for Paper F3 and cover everything needed to pass the exam well 🙂 )
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