Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 14

Purchases budget Each gallon of Old Guard, a popular aftershave lotion, requires 6 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2010 is:

Quarter I	10,000 gallons
Quarter II	18,000 gallons
Quarter III	11,000 gallons

Management’s policy is to have on hand at the end of every quarter enough ocean scent inventory to meet 30% of the next quarter’s production needs. At the beginning of Quarter I, 18,000 ounces of ocean scent were on hand.

Required:

a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2010.

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b. Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter’s production.

Step 1 of 3

a.

Calculate the number of OS’s ounces required to be purchased in each of the two quarters of 2010:

Steps to calculate the Usage:

• Consider the beginning inventory.

• Then, add purchases to the beginning inventory to arrive at raw materials available for use.

• Deduct the ending inventory from raw materials available for use to arrive at usage.

Raw material inventory/usage model
Particulars	Quarter I	Quarter II
Beginning inventory	18,000	32,400
Add: Purchases	?	?
Raw materials available for use	?	?
Less: Ending inventory (30% of next quarter’s usage)	(32,400)	(19,800)
Usage (6 ounces number of gallons of product to be produced)	60,000	108,000