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Direct Materials Budget

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Micro Products, Inc., has developed a very powerful electronic calculator. Each calculator requires four small "chips" that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below:

Year 2 Year 3
First Second Third Fourth First
Budgeted production, in calculators 60,000 85,000 144,000 94,000 70,000

The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stock outs. For this reason, the inventory of chips at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 48,000 chips will be on hand to start the first quarter of Year 2.

Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At the bottom of your budget, show the dollar amount of purchases for each and for the year in total.

Year 2
First Second Third Fourth Year
Production needs - chips
Add: Desired ending inventory-chips
Total needs - chips
Less: Beginning inventory-chips
Required purchases - chips
Cost of purchases

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Solution Summary

The solution explains how to prepare a direct material purchases budget

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The Scarborough Corporation manufactures and sells two products: Thingone and Thingtwo.

Dear OTA,

Please help me to understand all the steps. Please see attached file.

Revenue and production budgets.
The Scarborough Corporation manufactures and sells two products: Thingone and Thingtwo.

Data Input Section: Scarborough Corporation
Thingone Thingtwo
Projected sales for 2007 60,000 40,000
Projected selling price $165 $250
Inventories in units:
Expected, January 1, 2007 20,000 8,000
Target, December 31, 2007 25,000 9,000
Direct materials needed to produce 1 unit:
Direct materials Unit
A Pounds 4 5
B Pounds 2 3
C Each 0 1

Projected data for 2006 with respect to direct materials:

Direct materials Purchase price Expected inventories Jan. 1, 2007 Target inventories Dec. 31, 2007
A $12.00 32,000 36,000
B 5.00 29,000 32,000
C 3.00 6,000 7,000

Thingone Thingtwo
Direct labor-hours, projected 2 3
Rates per hour $12.00 $16.00
Overhead per direct labor hour (DLH) $20.00 $20.00


Manufacturing overhead is allocated at the rate of $20 per direct manufacturing labor-hour.
Based on the preceding projections and budget requirements for thingone and thingtwo, prepare the following budgets for 2007:

1. Production budget (in units)
2. Direct manufacturing purchases budget (in quantities)
3. Direct material purchases budget (in dollars)
4. Direct manufacuring labor budget (in dollars)
5. Budgeted finished goods inventory at December 31, 2007.

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