General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on June 30, the end of the current year. The company has budgeted the following production for the first four months of the coming year:
JulyAugustSeptemberOctoberProduction (units)100,000120,000150,000110,000
General Manufacturing desires each month's ending raw materials inventory to be 20% of the following month's production needs. A finished unit requires two pounds of raw materials.General Manufacturing's budgeted purchases of raw materials during July (in lbs.) should be:
208,000 lbs
1. Targeted ending inventory of raw materials, July = (0.20 × 120,000 units × 2 lbs./unit) = 48,000 lbs.
2. Raw materials needed for July's production = (2 lbs./unit × 100,000 units) = 200,000 lbs.
3. Beginning inventory of raw materials, July = 40,000 lbs. (given)
4. Required purchases of raw materials, July = Production requirements (July) + Desired ending inventory of raw materials ? Beginning inventory of raw materials = 200,000 lbs. + 48,000 lbs. ? 40,000 lbs. = 208,000 lbs.
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