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 13,000 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 84,000 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	55,000
August	60,000
September	70,000
October	50,000
November	40,000
December	30,000

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

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	55000	60000	70000	50000
Desired Ending Finished Inventory	14000	16000	12000	10000
Total Units needed	69000	76000	82000	60000
Less : Beginning Finished Inventory	13000	14000	16000	12000
Units to be Produced	56000	62000	66000	48000

.

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	56000	62000	66000	184000
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	168000	186000	198000	552000
Budgeted ending inventory (cc.)	93000	99000	72000*	72000
Total materials requirements (cc.)	261000	285000	270000	624000
Beginning inventory (cc.)	84000	93000	99000	84000
Materials to be purchased (cc.)	177000	192000	171000	540000

*48000 x 3 x 50%