Sue works in a company that manufactures shirts for school uniforms. For the past two years, she has been handling the production department's budgets for the company. The company has a policy to stock 10% of next month's sales in finished goods (FG) inventory and 20% of direct material inventory from the next month's direct materials (DM) requirement. The following production budget was in place for the current quarter of the year.
Assume that the quantity of direct material required is 2 meters of cloth for one shirt and the direct material cost per meter is $1.50. Help Sue calculate the total budgeted cost of ending DM inventory for the month of November.

Question

Sue works in a company that manufactures shirts for school uniforms. For the past two years, she has been handling the production department's budgets for the company. The company has a policy to stock 10% of next month's sales in finished goods (FG) inventory and 20% of direct material inventory from the next month's direct materials (DM) requirement. The following production budget was in place for the current quarter of the year.
 Assume that the quantity of direct material required is 2 meters of cloth for one shirt and the direct material cost per meter is $1.50. Help Sue calculate the total budgeted cost of ending DM inventory for the month of November.

Quizplus · Accepted Answer

Targeted Ending DM Inventory for November = DM Required for December × 20%; 4,500 × 20% = 900
Total Budgeted Cost of Ending DM Inventory for November = Targeted Ending DM Inventory for November × Cost per Meter; 900 × $1.5 = $1,350
See additional explanation below:
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Sue Works in a Company That Manufactures Shirts for School