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:

1. 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 10,600 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 66,000 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	43,000
August	48,000
September	58,000
October	38,000
November	28,000
December	18,000

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

For the company Supermix, one of the company’s products. which requires 3 cubic centimeters of Solvent H300, the opening details of the the finished goods and raw material in hand is given.

To calculate the Raw material budget first we need to calculate the production budget.

Production Budget = Budgeted sales units + Closing required units - Opening units. , based on it and the details given in the question the production budget will be as follows:

Production Budget for Supermix for the month of July , August , September and October. :

	July	August	September	October
Budgeted Unit Sales	43000	48000	58000	38000
Add : Budgeted Closing Inventory Units	11600	13600	9600	7600
Total Production Requirement	54600	61600	67600	45600
Less : Opening Finished Goods units	10600	11600	13600	9600
Units to be produced	44000	50000	54000	36000

Here the closing units for July is = 2000 + ( 48000 *20% ) = $ 11,600 { as given in the question that closing units of finished goods is 2000 + 20% of next month budget sales. so for every month it is calculated in same way.

with regards to opening , it is the closing of previous months units.

3. After the preparartion of Production Budget, we have the units to be produced, now we need to calculate the raw material required for production :

Direct material Budget = Material required for Production + Closing raw material - Opening raw material in hand.

Here the closing units are calculated as 50% of production required for next month : i.e for July months closing : it is 50% of production required of August i.e = 50%  of 150000 = 75000 units.

for september : = 1/2 * 108000 ( i.e october production *3 = 36000 * 3 = 108000)

with regards to opening , it is the closing of previous months units.

Production Budget for Supermix for the month of July , August , September and Total for Quarter :.

	July	August	September	Total for Quarter
Units to be Produced	44000	50000	54000	148000
X -Direct Material Purchase Per unit in cubic centimeters	3	3	3	3
Production Needs (A)	132000	150000	162000	444000
Desired Ending Inventory (B) ( 1/2 of next month production )	75000	81000	54000	54000
Total Requirements (C ) = (A + B)	207000	231000	216000	498000
Less: Beginnning Inventory (D)	66000	75000	81000	66000
Budgeted Direct Material to be Purchased ( C- D)	141000	156000	135000	432000