Assume for a firm that budgeted production for July and August is 180 000 and 200 000 units respectively. It takes half a kilogram of direct material to make one unit of finished product. Materials inventory is maintained at 10 per cent of the next month's budgeted production needs. If the 30 June inventory of materials was 9000 kg, how many kilograms of direct material should be purchased during July?
Question
Assume for a firm that budgeted production for July and August is 180 000 and 200 000 units respectively. It takes half a kilogram of direct material to make one unit of finished product. Materials inventory is maintained at 10 per cent of the next month's budgeted production needs. If the 30 June inventory of materials was 9000 kg, how many kilograms of direct material should be purchased during July?
Solution
To calculate the amount of direct material to be purchased in July, we need to follow these steps:
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Calculate the production needs for July and August in kilograms. Since it takes half a kilogram of direct material to make one unit of finished product, we multiply the production units by 0.5.
For July: 180,000 units * 0.5 = 90,000 kg For August: 200,000 units * 0.5 = 100,000 kg
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Calculate the materials inventory for July and August. The inventory is maintained at 10% of the next month's budgeted production needs.
For July: 10% of August's needs = 0.10 * 100,000 kg = 10,000 kg For August: We don't need to calculate this as it's not relevant to the question.
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Calculate the amount of direct material needed for production in July. This is the production needs for July plus the inventory needs for the end of July (which is the same as the inventory needs for the start of August), minus the inventory at the start of July.
Direct material needed = Production needs for July + Inventory needs for end of July - Inventory at start of July Direct material needed = 90,000 kg + 10,000 kg - 9,000 kg = 91,000 kg
So, the firm should purchase 91,000 kilograms of direct material during July.
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