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 is now 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:

a. The finished goods inventory on hand at the end of each month must be equal to 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 20,250 units.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 92,000 cc of solvent H300.

c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
July	73,000
August	78,000
September	88,000
October	68,000
November	58,000
December	48,000

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

Solution

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	73000	78000	88000	68000
Desired Ending Finished Inventory	21500	24000	19000	16500
Total Units needed	94500	102000	107000	84500
Less : Beginning Finished Inventory	20250	21500	24000	19000
Units to be Produced	74250	80500	83000	65500

.

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	74250	80500	83000	237750
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	222750	241500	249000	713250
Budgeted ending inventory (cc.)	120750	124500	98250	98250
Total materials requirements (cc.)	343500	366000	347250	811500
Beginning inventory (cc.)	92000	120750	124500	92000
Materials to be purchased (cc.)	251500	245250	222750	719500