ACCA Applied Knowledge · Management Accounting · Budget preparation
Kestrel Ltd budgets to produce 12,000 units next period. Each unit needs 3 kg of material costing $4 per kg. Opening inventory of materials is 5,000 kg and the closing inventory is planned at 8,000 kg. What is the budgeted material purchases cost?
Budgeted material purchases are $156,000. Usage is 36,000 kg, and purchases must also cover the 3,000 kg increase in inventory, giving 39,000 kg at $4 per kg. Using only production needs would give $144,000, which ignores the planned inventory build-up.
- A$156,000Correct
- B$144,000
- C$132,000
- D$168,000
Explanation
Material usage = 12,000 x 3 = 36,000 kg. Purchases = usage + closing inventory - opening inventory = 36,000 + 8,000 - 5,000 = 39,000 kg. At $4 per kg this is $156,000. $144,000 is the usage cost only, ignoring the inventory change.
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