MCO Leather Goods manufactures leather purses. Each purse requires 3 pounds of direct materials at a cost of $4 per pound and 0.7 direct labor hours at a rate of $17 per hour. Variable manufacturing overhead is charged at a rate of $2 per direct labor hour. Fixed manufacturing overhead is $13,000 per month. The company’s policy is to end each month with direct materials inventory equal to 20% of the next month’s materials requirement. At the end of August the company had 2,680 pounds of direct materials in inventory. The company’s production budget reports the following.
