A business makes and sells bikes for $500 each.

Here are the expected production in units:

Quarter 1: 3,600 bikes

Quarter 2: 3,000 bikes

Quarter 3: 2,700 bikes

To make the bike requires 20 parts which cost $10 each.

The business likes to keep 5% of next months parts needed ending inventory.

What is the direct materials budget for Quarter 2?

Question

A business makes and sells bikes for $500 each.

Here are the expected production in units:

Quarter 1: 3,600 bikes

Quarter 2: 3,000 bikes

Quarter 3: 2,700 bikes

To make the bike requires 20 parts which cost $10 each.

The business likes to keep 5% of next months parts needed ending inventory.

What is the direct materials budget for Quarter 2?

BlackTom AI · Accepted Answer

First, identify the direct materials per unit and the production plans for the quarter.
- Each bike requires 20 parts, and each part costs $10, so the direct materials cost per bike is 20 × $10 = $200.
- Q2 planned production is 3,000 bikes, so the total parts needed for production in Q2 = 3,000 bikes × 20 parts/bike = 60,000 parts.

Next, determine the beginning and ending inventory requirements for direct materials.
- Ending inventory policy: keep 5% of next month’s parts needed.
- Next month after Q2 is Q3, whose planned production is 2,700 bikes. Parts needed for Q3 = 2,700 bikes × 20 parts/bike = 54,000 parts.
- Ending inventory for Q2 = 5% of 54,000 parts = 2,700 parts.
- Ending inventory in dollars = 2,700 parts × $10/part = $27,000.

- Beginning inventory for Q2 is the ending inventory from Q1. Q1’s next month is Q2, with planned production 3,000 bikes, so parts needed for Q2 = 3,000 × 20 = 60,000 parts; 5% of 60,000 = 3,000 parts. Beginning inventory = 3,000 parts × $10 = $30,000.

Now apply the direct materials budget formula:
Direct materials purchases (in dollars) = Materials needed for production in the quarter + Ending inventory (in dollars) − Beginning inventory (in dollars).
- Materials needed for production in Q2 = 60,000 parts × $10 = $600,000.
- Ending inventory in dollars = $27,000.
- Beginning inventory in dollars = $30,000.
- DM purchases = $600,000 + $27,000 − $30,000 = $597,000.

Option analysis:
- $603,000: This would occur if you used the ending inventory or beginning inventory values incorrectly, for example by not subtracting the beginning inventory or by miscomputing 5% of next month’s demand. The correct adjustment reduces the purchases from $600,000 by the net change in inventories.
- I don't know.: This is not a calculation; it’s not addressing the problem.
- $597,000: This matches the correct calculation above, using 60,000 parts for production, 3,000 parts beginning inventory, and 2,700 parts ending inventory, all valued at $10 each.
- $627,000: This would imply a larger adjustment, such as a miscalculation of the ending inventory (e.g., using 5% of 60,000 instead of 54,000) or failing to subtract beginning inventory, leading to an overstated total.

In summary, the direct materials budget for Quarter 2 is derived from 60,000 parts needed for production, with 3,000 parts on hand at the start and 2,700 parts planned to be on hand at the end, all valued at $10 per part, giving $597,000 in direct material purchases for the quarter.

BACC011 Week 9: Practice Quiz

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