Budgeted raw material purchase — OpenTuition Forums

SSanaf10y ago

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 : 172,000

John MoffatTutor10y ago#1

Inventory 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 :-) )

SSanaf10y ago#2

Thank you John; your help is very much appreciated. Regards Sanaf

John MoffatTutor10y ago#3

You are welcome :-)