2. Prepare a direct materials purchases budget for chemicals for the months of January and February — Selva Inc makes keyboards tablets packages them crates containing per crate

Selva Inc. makes keyboards for tablets, and packages them in crates containing 50 keyboards per crate. Planned production in units for the first three months of the coming year is:

January ……………….. 43,800

February ……………….41,000

March ………………….50,250

Each keyboard requires two litres of chemicals and one plastic crate. Company policy requires that ending inventories of raw materials for each month be 15 percent of the next month’s production needs. That policy was met for the ending inventory of December in the prior year. The cost of one litre of chemicals is $0.50. The cost of one crate is $1.60.

Required:

1. Calculate the ending inventory of chemicals in litres for December of the prior year, and for January and February. What is the beginning inventory of chemicals for January?

2. Prepare a direct materials purchases budget for chemicals for the months of January and February.

3. Calculate the ending inventory of crates for December of the prior year, and for January and February. What is the beginning inventory of crates for January?

4. Prepare a direct materials purchases budget for crates for the months of January and February.

SOLUTION

1. Ending inventory for December

(and beginning inventory for January)= 0.15 × 2 litres of chemicals × 43,800 units

= 13,140 litres

Ending inventory for January = 0.15 × 2 litres of chemicals × 41,000 units

= 12,300 litres

Ending inventory for February = 0.15 × 22 litres of chemicals × 50,250 units

= 15,075 litres

2. Direct materials purchases budget—Chemicals:

January February

Production in units 43,800 41,000

× Litres per unit × 2 × 2

Litres for production 87,600 82,000

Desired ending inventory 12,300 15,075