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 is now 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:

a. The finished goods inventory on hand at the end of each month must be equal to 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.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 62,000 cc of solvent H300.

c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
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

(1) Preparation of production budget is as follows:

	July	August	September	October
Sales	43,000	48,000	58000	38000
Desired ending inventory	11,600	13,600	9,600	7600
Total needs	54,600	61,600	67,600	45,600
Less: Beginning inventory	10,600	11,600	13,600	9,600
Units to be produced	44,000	50,000	54,000	36,000

Working note:

1. Ending Inventory:

Ending inventory is 20% of next month sales + 2,000

	July	August	September	October
Next month sales	48,000	58000	38000	28000
Ending Inventory (%)	20%	20%	20%	20%
Ending Inventory	9,600	11,600	7,600	5,600
Add: Fixed Ending inventory	2,000	2,000	2,000	2,000
Ending Inventory	11,600	13,600	9,600	7,600

2. Beginning Inventory:

Beginning inventory of curent month is ending inventory of previous month

The finished goods inventory on June 30 is budgeted to be 10,600 units. (given in Question)

Thus, Beginning inventory of july is Ending inventory of June i.e 10,600 units

(3) Preparation of a direct materials budget

	July	August	September	Total
Budgeted production	44,000	50,000	54,000	1,48,000
Material required per unit	3	3	3	3
Total needs of material for production (kg)	1,32,000	1,50,000	1,62,000	4,44,000
Add: Ending inventtory of materials (kg)	75,000	81,000	54000	2,10,000
Less: Beginning inventory of materials (kg)	62,000	75,000	81,000	2,18,000
Direct material required to be purchase	1,45,000	1,56,000	1,35,000	4,36,000

Working note:

1. Ending Inventory:
Material Ending inventory is one half of following month production needs of raw materials
	July	August	September
Next month production requirement of raw materials	150000	162000	108000
Ending Inventory (%)	50%	50%	50%
Ending Inventory of Raw materials	75,000	81,000	54,000
Septmeber month Ending raw material inventory = one half of Next month's Production needs In raw materials
Septmeber month Ending raw material inventory = One half of October month Production needs In raw materials
= one half of ( 36000 * 3 )
= one half of 108,000
= 54,000
2. Beginning Inventory:
Beginning inventory of curent month is ending inventory of previous month
The raw materials inventory on June 30 is budgeted to be 62,000 cc of solvent H300. Thus, Beginning inventory of Raw materials for July month is 62,000