Budgeted Purchases Managerial Accounting Question

Question

I need detailed help with steps on how to solve this, and why answer was B) :

 

Prestwich Company has budgeted production for next month as follows :

 

Production In Units :

1st Quarter : 60,000

2nd Quarter : 80,000

3rd Quarter : 90,000

4th Quarter : 70,000

 

Two pounds of material A are required for each unit produced. The company has a policy of maintaining a stock of material A on hand at the end of each quarter equal to 25% of the next month's production needs for material A. A total of 30,000 pounds of Material A are on hand to start the year. Budgeted purchases of material A for the second quarter would be :

A) 82,500 B) 165,000 C) 200,000 D) 205,000 E) None

Answer 1

The correct answer is B) $165,000 budgeted purchases of material A for Q2.

 

At the end of Q1 material A stock on hand is $10,000. This is arrived at as follows:

- Material A Stock on hand at the beginning of Q1=      30,000

 

- Purchases required to meet Q1 Production req. =      90,000

-Purchases required to meet 25% Material on hand=    10,000 ( 40,000X25%)

Less- Production's requirement for Q1 = 60,000X2=   (120,000)

 Material A balance on hand at end Q1                    =   10,000

 Purchases required to meet Q2 Production material     150,000

 Purchases required to meet 25% Q2 Material on hand   15,000 (60,000X25%)

Less- Production's requirement for Q2 = 80,000X2=     (160,000)

Material A balance on hand at end Q2 =                         15,000

From the above Q2 Budgeted purchases would be  165,000 ( 150,000 for production + 15,000 25% on hand stock)