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:

1. The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 21,250 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 105,375 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	69,000
August	74,000
September	84,000
October	64,000
November	54,000
December	44,000

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.

Pearl Products Limited Production Budget July August September October Budgeted unit sales Total needs Required production in units

	Pearl Products Limited Direct Materials Budget July August September Third Quarter Units of raw materials needed per unit of finished goods cc cc cc cc Units of raw materials needed to meet production Total units of raw materials needed Units of raw materials to be purchased

Answer 1

Answer 1:

Production Budget
	July	August	September	October
Budgeted unit sales	69,000	74,000	84,000	64,000
Add: Closing finished goods	22,500	25,000	20,000	17,500
Total needs	91,500	99,000	104,000	81,500
Less: Opening finished goods	21,250	22,500	25,000	20,000
Required production in units	70,250	76,500	79,000	61,500

Answer 2:

Direct Material Budget
	July	August	September	Third quarter
Required production in units	70,250	76,500	79,000	225,750
Units of raw materials needed per unit of finished goods	3	3	3	3
Units of raw materials needed to meet production	210,750	229,500	237,000	677,250
Add: Closing Raw Material	114,750	118,500	92,250	92,250
Total units of raw materials needed	325,500	348,000	329,250	1,002,750
Less: Opening Raw Material	105,375	114,750	118,500	105,375
Units of raw materials to be purchased	220,125	233,250	210,750	664,125

In case of any doubt, please feel free to comment.