Three grams of musk oil are required for each bottle of Mink Caress, a very popu

Question

Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in wester Siberia. The cost of the musk oil is $1.50 per gram. Budgeted production of Mink Caress is given below by quarters for year 2 and for the first quarter of year 3:

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 season, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 36,000 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. At the bottom of your budget, show the amount of purchases for each quarter and for the year in total.

Year 2 Year 3 First Second third Fourth First Budgeted production, in bottles 60000 90000 150000 100000 70000

Explanation / Answer

Direct Materials Budget Q1 Q2 Q3 Q4 Total Budgeted Production in bottles (A) 60000 90000 150000 100000 400000 Quantity of musk required per bottle (B) 3 3 3 3 3 Total quantity required (C=A*B) 180000 270000 450000 300000 1200000 Add: Desired ending inventory (D) 54000 90000 60000 42000 42000 (270000*20%) (450000*20%) (300000*20%) (70000*3*20%) Less: Opening Inventory (E') 36000 54000 90000 60000 36000 Purchases in grams (F=C+D-E) 198000 306000 420000 282000 1206000 Rate per gram (G) 1.5 1.5 1.5 1.5 1.5 Total Purchases in dollars (H=F*G) 297000 459000 630000 423000 1809000

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