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:

The finished goods inventory on hand at the end of each month must equal 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,200 units.

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 108,000 cc of solvent H300.   

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	71,000
August	76,000
September	86,000
October	66,000
November	56,000
December	46,000

Required:

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

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

SOLUTION

1. Production Budget-

	July	August	September	October
Budgeted Unit Sales	71,000	76,000	86,000	66,000
(+) Estimated Ending Inventory	[3000 + (76000 * 20%)]= 18,200	[3000 + (86000 * 20%)] = 20,200	[3000 + (66000 * 20%)]= 16,200	[3000 + (56000 * 20%)] = 14,200
Total needs	89,200	96,200	102,200	80,200
(-) Estimated Beginning Inventory	17,200	18,200	20,200	16,200
Required production	72,000	78,000	82,000	64,000

2. Direct materials budget

	July	August	September	Quarter
Required Production of finished goods	72,000	78,000	82,000	232,000
Units of raw materials needed per unit of finished goods	3cc	3cc	3cc	3cc
Units of raw materials needed to meet production	216,000	234,000	246,000	696,000
(+) Ending Inventory	(234000/2)=117,000	(246000/2)= 123,000	(192000/2)= 96,000
Total units of raw materials needed	333,000	357,000	342,000	1,032,000
(-) Beginning Inventory	108,000	117,000	123,000
Units of raw materials to be purchased	225,000	240,000	219,000	684,000

*October Production needs = 64000 * 3 = 192000