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 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 15,400 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 86,000 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	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

Particulars	July	August	September	October
(a) Budgeted Sales	67,000	72,000	82,000	62,000
(b) Desired Inventory at the end of the month (2000 + 20% of next month sale)	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) Begining 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

Particulars	July	August	September	Total for the Quarter
(a) Units to be produced	68,000	74,000	78,000	220,000
(b) Units Required of H300 in Production	68,000 * 3 = 204,000	74,000 * 3 = 222,000	78,000 * 3 = 234,000	220,000 * 3 = 660,000
(c) Ending Inventory required of H300 (50% Of Next Month Production Needs )	222,000 * 50% = 111,000	234,000 * 50% = 117,000	60,000 * 3 * 50% = 90,000	90,000
(d) Total Units Required of Material (b+c)	315,000	339,000	324,000	750,000
(e) Begining Balance of Material	86,000	111,000	117,000	86,000
(f) Units to be purchased (d-e)	229,000	228,000	207,000	664,000