Moreno Industries has adopted the following production budget for the first 4 months of 2013.
Month Units Month Units
January 10,000 March 5,000
February 8,000 April 4,000
Each unit requires 3 pounds of raw materials costing $2 per pound. On December 31, 2012, the ending raw materials inventory was 9,000 pounds. Management wants to have a raw materials inventory at the end of the month equal to 30% of next month's production requirements.
Complete the direct materials purchases budget by month for the first quarter.
To complete the direct materials purchases budget, we need to calculate the raw materials needed for production each month, the desired ending inventory of raw materials, and then determine the raw materials purchases required.
First, let's calculate the raw materials required for production each month. Each unit requires 3 pounds of raw materials, so to find the raw materials needed, we multiply the number of units by 3 pounds per unit.
January: 10,000 units x 3 pounds = 30,000 pounds
February: 8,000 units x 3 pounds = 24,000 pounds
March: 5,000 units x 3 pounds = 15,000 pounds
April: 4,000 units x 3 pounds = 12,000 pounds
Next, let's calculate the desired ending inventory of raw materials for each month. Management wants to have an ending inventory equal to 30% of the next month's production requirements.
January ending inventory: 30% x 24,000 pounds (February's production requirements) = 7,200 pounds
February ending inventory: 30% x 15,000 pounds (March's production requirements) = 4,500 pounds
March ending inventory: 30% x 12,000 pounds (April's production requirements) = 3,600 pounds
April ending inventory: 0 (no production requirements for the following month)
Now we can calculate the raw materials purchases required for each month. To get the raw materials purchases, we need to subtract the beginning inventory (given as 9,000 pounds) and the desired ending inventory from the raw materials required for production.
January Purchases = January raw materials required + January ending inventory - December 31, 2012, ending inventory
= 30,000 pounds + 7,200 pounds - 9,000 pounds = 28,200 pounds
February Purchases = February raw materials required + February ending inventory - January ending inventory
= 24,000 pounds + 4,500 pounds - 7,200 pounds = 21,300 pounds
March Purchases = March raw materials required + March ending inventory - February ending inventory
= 15,000 pounds + 3,600 pounds - 4,500 pounds = 14,100 pounds
April Purchases = April raw materials required + April ending inventory - March ending inventory
= 12,000 pounds + 0 - 3,600 pounds = 8,400 pounds
Therefore, the completed direct materials purchases budget by month for the first quarter is as follows:
Month Purchases
January 28,200 pounds
February 21,300 pounds
March 14,100 pounds
April 8,400 pounds