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 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,800 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 60,000 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	39,000
August	44,000
September	54,000
October	34,000
November	24,000
December	14,000

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:

Pearl Products Limited
Production Budget
Particulars	July	August	September	October
Budgeted unit sales	39000	44000	54000	34000
Add: Desired Ending Inventory	12800	14800	10800	8800
Total needs	51800	58800	64800	42800
Less: Beginning inventory	11800	12800	14800	10800
Required production in units	40000	46000	50000	32000

Solution 2:

Pearl Products Limited
Direct Materials Budget
Particulars	July	August	September	Third Quarter
Budgeted Production Units	40000	46000	50000	136000
Units of raw materials needed per unit of finished goods (in cc)	3	3	3	3
Units of raw materials needed to meet production (In cc)	120000	138000	150000	408000
Add: Desired Ending inventory of raw materials	69000	75000	48000	48000
Total units of raw materials needed	189000	213000	198000	456000
Less: Beginning inventory of raw materials	60000	69000	75000	60000
Units of raw materials to be purchased (In cc)	129000	144000	123000	396000