6.3. Budgeting material purchases. The Mahoney Company has prepared a sales budg

Question

6.3. Budgeting material purchases. The Mahoney Company has prepared a sales budget of 45,000 finished units for a three-month period. The company has an inventory of 16,000 units of finished goods on hand at December 31 and has a target finished goods inventory of 18,000 units at the end of the succeeding quarter. It takes three gallons of direct materials to make one unit of finished product. The company has an inventory of 60,000 gallons of direct materials at December 31 and has a target ending inventory of 50,000 gal- lons at the end of the succeeding quarter. How many gallons of direct materials should be purchased during the three months ending March 31?

Explanation / Answer

Sales Budget = 45000 units

Finished goods on hand at December 31 = 16000 units

Target finished goods inventory = 18000 units

Thus,

Finished goods to be manufactured = Sales Budget - Finished goods on hand at December 31 + Target finished goods inventory

Finished goods to be manufactured = 45000 – 16000 + 18000 = 47000 units

To manufacture 47000 units, Direct material required = 3*47000 = 141000 gallons

Inventory of direct materials at December 31 = 60,000 gallons

Target ending inventory = 50,000 gallons

Thus,

Direct Material to be purchased = Direct material required - Inventory of direct materials at December 31 + Target ending inventory

Direct Material to be purchased = 141000 – 60000 + 50000

Direct Material to be purchased = 131000 gallons

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