Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must equal 3,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 16,250 units.

2. The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 81,375 cc of solvent H300.

3. The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

	Budgeted Unit Sales
July	53,000
August	58,000
September	68,000
October	48,000
November	38,000
December	28,000

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Answer 1

1
Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	53000	58000	68000	48000
Add: Desired units of ending finished goods inventory	17500	20000	15000	12500
Total needs	70500	78000	83000	60500
Less: Units of beginning finished goods inventory	16250	17500	20000	15000
Required production in units	54250	60500	63000	45500
3
Pearl Products Limited
Direct Materials Budget
	July	August	September	Third Quarter
Required production in units of finished goods	54250	60500	63000	177750
Raw materials needed per unit of finished goods	3	3	3	3
Units of raw materials needed to meet production	162750	181500	189000	533250
Add: Desired units of ending raw materials inventory	90750	94500	68250	68250
Total units of raw materials needed	253500	276000	257250	601500
Less: Units of beginning raw materials inventory	81375	90750	94500	81375
Units of raw materials to be purchased	172125	185250	162750	520125

Workings:
Desired units of ending finished goods inventory
July	17500	=3000+(58000*25%)
August	20000	=3000+(68000*25%)
September	15000	=3000+(48000*25%)
October	12500	=3000+(38000*25%)
Desired units of ending raw materials inventory:
July	90750	=181500*50%
August	94500	=189000*50%
September	68250	=45500*3*50%