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Manufacturing: Direct materials budget LO P1 Each unit requires 2 pounds of direct materials, which cost $5 per pound. The company’s policy is to maintain direct materials inventory equal to 40% of the next month’s direct materials requirement. As of June 30, the company has 3,520 pounds of direct materials in inventory, which complies with the policy. Prepare a direct materials budget for July.

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Answer:

Provided material required = 2 pounds for each unit.

Also the company maintains 40% of stock at month end for upcoming month's requirement.

Here, the company has 3,520 pound of raw material as on 30 June which is equivalent to 40% of requirement of July.

Therefore Requirement for July = 3,520/40% = 8,800 is actual total requirement.

Total to be purchased = 8,800 - 3,520 = 5,280 pounds

Rate provided = $5 per pound.

Budget will be

Opening Stock = 3,520 [tex]\times[/tex] $5 = $17,600

Add: Purchases = 5,280 [tex]\times[/tex] $5 = $26,400

Note: The requirement of August has not been provided thus closing inventory can not be computed and if it would have been provided then 40% of such requirement would have been purchased in July as well.

Final Answer

Budget will be

Opening Stock = 3,520 [tex]\times[/tex] $5 = $17,600

Add: Purchases = 5,280 [tex]\times[/tex] $5 = $26,400

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