Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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 2,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 15,400 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 102,000 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 67,000 August 72,000 September 82,000 October 62,000 November 52,000 December 42,000 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

Solution :

(1) Production budget for Suermix for the months of July, August, September and October :

Particulars	July	August	September	October
(A) Budgeted Unit Sales	67,000	72,000	82,000	62,000
(B) Desired Units at the end of the month (2000 + 20% of Following month sales)	2000 + ( 72,000 * 20%) = 16,400	2000 + ( 82,000 * 20%) = 18,400	2000 + ( 62,000 * 20%) = 14,400	2000 + ( 52,000 * 20%) = 12,400
(C) Total Units Required (A+B)	83,400	90,400	96,400	74,400
(D) Opening Inventory	15,400	16,400	18,400	14,400
(E) Units to be produced (C-D)	68,000	74,000	78,000	60,000

(2) Direct Material Budget for July, August, September and for the quarter :

Particulars	July	August	September	Total for the Quarter
(A) Units to be produced of Supermix	68,000	74,000	78,000	220,000
(B) Solvent H300 Units Required in Production (Production of Supermix * 3)	68,000 * 3 = 204,000	74,000 * 3 = 222,000	78,000 * 3 = 234,000	220,000 * 3 = 660,000
(C) Closing Inventory desired of Solvent H300 (50% of Next Month Production)	50% * 222,000 = 111,000	50% * 234,000 = 117,000	50% * 60,000 * 3 = 90,000	90,000
(D) Opening Inventory of H300	102,000	111,000	117,000	102,000
(E) Units to be purchased (B+C-D)	213,000	228,000	207,000	648,000