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 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 12,400 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 72,000 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	47,000
August	52,000
September	62,000
October	42,000
November	32,000
December	22,000

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

	Finished goods production budget
		July	August	september	October	November
	Sales	47000	52000	62000	42000	32000
Add:	Closing stock	13400	15400	11400	9400
	(3000+ 20% of next month sale)
Less	Opening Stock	12400	13400	15400	11400
	Production units	48000	54000	58000	40000
		* June 30 inventory of finished goods become opening for July, 17
		** Each unit of finished goods requre 3 units of Material H300
	Raw material procurement budget
		July	August	september	October
	Production of finished goods units (A)	48000	54000	58000	40000
	Raw material requirement per unit (B)	3	3	3	3
	Total raw material requrie for production (A*B)	144000	162000	174000	120000
Add	Closing stock	81000	87000	60000
	( half of next month production requirement)
Less	Opening stock	72000	81000	87000
	To be purchased	153000	168000	147000
	Total purcahse of H300 for quarter	468000