Question

Cahuilla Corporation predicts the following sales in units for the coming four months:

April May June July
Sales in Units 420 460 480 420

Each month's ending Finished Goods Inventory should be 40% of the next month's sales. March 31 Finished Goods inventory is 168 units. A finished unit requires 5 pounds of direct material B at a cost of $2.00 per pound. The March 31 Raw Materials Inventory has 270 pounds of B. Each month's ending Raw Materials Inventory should be 30% of the following month's production needs. The budgeted cost of direct material B during May should be:
Multiple Choice
a. $468.
b. $6,048.
c. $456.
d. $3,276.
e. $4,644.

Answer 1

To calculate the budgeted cost of direct material B during May, you need to compute the production needs, desired ending inventory, and material requirements. After calculating the quantity of material B that needs to be purchased, multiply it by the cost per pound to get $4,756.

Step-by-step explanation:

The budgeted cost of direct material B during May can be calculated by following these steps:

• First, determine the desired ending Finished Goods Inventory for May. This is 40% of June's sales (480 units in June * 40% = 192 units for May's ending inventory).
• Then, calculate May's total production needs by adding the desired ending Finished Goods Inventory for May to the sales units for May and subtracting the beginning Finished Goods Inventory (which is the ending inventory of April, same as the start of May). Here, the beginning Finished Goods Inventory for May will be 40% of May's sales, since April's sales are 420 units (420 units in May * 40% = 168 units). So, the production needs for May = 460 units (May sales) + 192 units (desired ending inventory for May) - 168 units (beginning inventory for May) = 484 units.
• To find out the production needs in terms of material B, multiply the production needs by 5 pounds per unit (484 units * 5 pounds/unit = 2420 pounds of material B).
• Next, calculate the desired ending Raw Materials Inventory for May, which is 30% of the following month's production needs in pounds of material B. To get June's production needs in units, you calculate: 480 units (June sales) + 40% of July's sales as ending inventory (420 units in July * 40% = 168 units) - 40% of June's sales as beginning inventory (192 units) = 456 units. Therefore, June's production needs in pounds = 456 units * 5 pounds/unit = 2280 pounds. Thus, the desired ending inventory for May = 30% of 2280 pounds = 684 pounds.
• The beginning Raw Materials Inventory for May is the same as the ending inventory of April, which is 30% of May's production needs. So, the beginning inventory for May = 30% of 2420 pounds (May's production needs) = 726 pounds.
• To find the total material B to be purchased in May, subtract the beginning inventory from the sum of the month's production needs and the desired ending inventory: (2420 pounds + 684 pounds) - 726 pounds = 2378 pounds.
• Finally, to get the cost, multiply the pounds to be purchased by the cost per pound of material B, which is $2.00/pound: 2378 pounds * $2.00/pound = $4756.

Hence, the budgeted cost of direct material B during May should be $4,756.