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 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 15,400 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 102,000 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	67,000
August	72,000
September	82,000
October	62,000
November	52,000
December	42,000

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

Based on the information available in the question, we can prepare the following:-

Requirement 1:-

The production budget is setup as follows:-

Particulars	July	August	September	October	November	December
Budgeted Unit Sales	67,000	72,000	82,000	62,000	52,000	42,000
Add:- Desired Ending inventory(20% of next month sales + 2,000 units)	16,400	18,400	14,400	12,400	10,400
Total required	83,400	90,400	96,400	74,400	62,400
Less:- Opening Inventory	(15,400)	(16,400)	(18,400)	(14,400)	(12,400)
Units to be produced	68,000	74,000	78,000	60,000	50,000

Requirement 3:-

The direct material purchase budget is setup as follows:-

Particulars	July	August	September	October	November
Units to be produced (A)	68,000	74,000	78,000	60,000	50,000
Raw materials per unit reqd (B)	3	3	3	3	3
Units of raw materials needed to meet production (D = A*B)	204,000	222,000	234,000	180,000	150,000
Add:- Desired Ending inventory (C= 50% of next months production needs)	111,000	117,000	90,000	75,000
Total Units of raw material needed (E=C+D)	315,000	339,000	324,000	255,000
Less:- Opening Inventory	(102,000)	(111,000)	(117,000)	(90,000)
Units to be produced	213,000	228,000	207,000	165,000

Please let me know if you have any questions via comments and all the best :) !