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 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,000 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 54,000 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	35,000
August	40,000
September	50,000
October	30,000
November	20,000
December	10,000

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

Pearl Products Limited
Production Budget working for Finished Goods
	July	August	September	October	November	December
Units to be sold	35000	40000	50000	30000	20000	10000
Desired Ending Finished Inventory	11000*	13000	9000	7000	5000
Total Units needed	46000	53000	59000	37000	25000
Less : Beginning Finished Inventory	10000	11000**	13000	9000	7000
Units to be Produced	36000	42000	46000	28000	18000

*3000+(4000*20%) and so on for other months

**Ending of last month is beginning of current month

Pearl Products Limited
Raw material purchase budget working
	July	August	September	October	November
Total Finished Units to be Produced (in Units)	36000	42000	46000	28000	18000
Raw material needed per Finished Unit (in cc)	3	3	3	3	3
Total Raw material Required for production ( in Cc)	108000	126000	138000	84000	54000
Add: Desired Ending Inventory ( in Cc)	63000*	69000	42000	27000
Total raw material needed ( in Cc)	171000	195000	180000	1E+05
Less: Beginning Raw Material available ( in Cc)	54000	63000	69000	42000
Raw material units to purchase ( in Cc)	117000	132000	111000	69000

*Half of august Raw material needs ie. 126000/2 and same calculation for other months.

Pearl Products Limited
Production Budget
	July	August	September	October
Units to be sold	35000	40000	50000	30000
Desired Ending Finished Inventory	11000	13000	9000	7000
Total Units needed	46000	53000	59000	37000
Less : Beginning Finished Inventory	10000	11000	13000	9000
Units to be Produced	36000	42000	46000	28000

Pearl Products Limited
Raw material purchase budget
	July	August	September	Quarter
Total Finished Units to be Produced (in Units)	36000	42000	46000	124000
Raw material needed per Finished Unit (in Cc)	3	3	3	3
Total Raw material Required for production ( in Cc)	108000	126000	138000	372000
Add: Desired Ending Inventory ( in Cc)	63000	69000	42000	42000
Total raw material needed ( in Cc)	171000	195000	180000	414000
Less: Beginning Raw Material available ( in Cc)	54000	63000	69000	54000
Raw material units to purchase ( in Cc)	117000	132000	111000	360000