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Old Guard: Materials Budget & Reason for Ending Inventory

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Each gallon of Old Guard, a popular aftershave lotion, requires 3 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2013 is:

Quarter I 13,000 gallons
Quarter II 18,000 gallons
Quarter III 12,000 gallons

Management's policy is to have at the end of every quarter enough ocean scent inventory to meet 28% of the next quarter's production needs. At the beginning of Quarter I, 10,920 ounces of ocean scent were on hand.

a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2013
Quarter I Quarter II
Number of ounces

b. Indicate why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter's production. (Select all that apply.)

1. Inventory provides a cushion for delivery delays.
2. Inventory provides a cushion for production needs in excess of production forecast.
3. Inventory provides a cushion for payment delays.
4. Inventory provides a cushion for sales needs in excess of sales forecast.

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Solution Summary

See Excel attached for schedules to guide you and instructional notes. Click in cells to see computations.

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References:

Mikesell, J. L. (2010). Fiscal administration: Analysis and applications for the public sector (8th ed.: 2010 custom edition). Mason, OH: Cengage Learning.

Occupational Handbook 2010-11 Edition http://www.bls.gov/oco/ocos003.htm

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