Moreno Industries Has Adopted The Following Production Budge

Moreno Industries Has Adopted The Following Production Budget For The

Moreno Industries has adopted the following production budget for the first 4 months of 2013: January, 10,000 units; February, 8,000 units; March, 5,000 units; April, 4,000 units. Each unit requires 3 pounds of raw materials, costing $2 per pound. On December 31, 2012, the ending raw materials inventory was 9,000 pounds. Management wants to have a raw materials inventory at the end of each month equal to 30% of the next month’s production requirements. Complete the direct materials purchases budget by month for the first quarter.

Paper For Above instruction

Introduction

The effective management of raw materials is pivotal to maintaining optimal production flow and controlling costs in manufacturing companies. For Moreno Industries, developing a precise direct materials purchases budget aligned with the production schedule and inventory policies is essential. This plan ensures that raw materials are sufficiently stocked to meet production needs while avoiding excess inventory that can increase carrying costs. The following analysis systematically calculates the required raw materials purchases for the first quarter of 2013, considering production forecasts, desired ending inventory levels, and beginning inventory.

Production Budget Overview

The production forecast for Moreno Industries indicates a decreasing trend over the first quarter: January (10,000 units), February (8,000 units), and March (5,000 units). Each unit demands 3 pounds of raw materials, which equates to a monthly requirement based on the number of units produced.

Calculating Raw Material Needs

For each month, the total raw materials required for production equals the number of units produced multiplied by 3 pounds per unit. For instance, January’s needs are 10,000 units × 3 pounds = 30,000 pounds.

Inventory Policy and Planning

Management aims to maintain an ending raw materials inventory equal to 30% of the next month’s production needs. This policy ensures a buffer stock to prevent production disruptions due to shortages. To implement this, the desired ending inventory for each month is calculated based on the subsequent month’s requirements.

Beginning and Ending Inventory Calculations

The beginning inventory for January is the previous period’s ending inventory, which equals 9,000 pounds as of December 31, 2012. The ending inventory for each month incorporates the desired ending inventory based on the policy, and the actual purchases are determined by adjusting for these inventory requirements alongside the production needs.

Step-by-step Calculation for the First Quarter

January:

- Required raw materials for production: 10,000 units × 3 pounds = 30,000 pounds.

- Desired ending inventory: 30% of February’s requirement (February: 8,000 units × 3 = 24,000 pounds) which equals 7,200 pounds.

- Total raw materials needed: 30,000 pounds (for production) + 7,200 pounds (ending inventory) = 37,200 pounds.

- Beginning inventory: 9,000 pounds.

- Raw materials to purchase: 37,200 pounds - 9,000 pounds = 28,200 pounds.

February:

- Required raw materials for production: 8,000 units × 3 = 24,000 pounds.

- Desired ending inventory: 30% of March’s requirement (March: 5,000 units × 3 = 15,000 pounds), which equals 4,500 pounds.

- Total raw materials needed: 24,000 + 4,500 = 28,500 pounds.

- Beginning inventory: ending inventory of January, which is 7,200 pounds.

- Raw materials to purchase: 28,500 - 7,200 = 21,300 pounds.

March:

- Required raw materials for production: 5,000 units × 3 = 15,000 pounds.

- Desired ending inventory: 30% of April’s requirement (April: 4,000 units × 3 = 12,000 pounds), which equals 3,600 pounds.

- Total raw materials needed: 15,000 + 3,600 = 18,600 pounds.

- Beginning inventory: ending inventory of February, which is 4,500 pounds.

- Raw materials to purchase: 18,600 - 4,500 = 14,100 pounds.

Costing and Purchasing Budget

Given the cost of raw materials at $2 per pound, the monetary value of the purchases for each month can be calculated by multiplying the required pounds by this price:

- January: 28,200 pounds × $2 = $56,400.

- February: 21,300 pounds × $2 = $42,600.

- March: 14,100 pounds × $2 = $28,200.

Conclusion

This detailed direct materials purchases budget ensures Moreno Industries maintains adequate raw materials stock levels aligned with production needs and inventory policies. Regular monitoring and adjustments are vital to accommodate variations in production schedules, supplier lead times, and cost fluctuations, thereby supporting smooth operations and cost efficiency.

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