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A business has budgeted to produce 20,000 units and sell 18,000 units of its single product. The budgeted information per unit is as follows:
Direct materials (2 kg @ $7.50) so $15
Direct labour (3 hrs @ $4) so $12
Sales $54Opening inventory of finished goods is 2.000 units.
Opening inventory of raw material is 4,000 kg whilst closing inventory of raw materials is expected to be 5,000 kg.
Question:
The total material purchases are:
(A) $307,500
(B) 292,500
(C) $60,000
(D) $285,000The answer is ‘A’.
Please highlight my mistake
Why we are not doing like this:
Material Usage = 18000 units *2 kg = 36000 kg
Material usage + closing raw material – opening raw material = material purchases
36000+5000-4000= 37000.
37000*7.5= 277500Material used depends on units made, nothing else. Therefore material used = 20,000 x 15 = $300,000
in addition to usage, material also increased by 1,000 kg between opening and closing stocks so another 1,000 had to be bought for 7,500.
Total purchases = 300,000 (for usage) + 7,500 (stock increase) = 307,500
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