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.
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
The solution explains how to prepare a direct material purchases budget