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 planning its 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

1
Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	67000	72000	82000	62000
Add: Desired units of ending finished goods inventory	16400	18400	14400	12400
Total needs	83400	90400	96400	74400
Less: Units of beginning finished goods inventory	15400	16400	18400	14400
Required production in units	68000	74000	78000	60000
3
Pearl Products Limited
Direct Materials Budget
	July	August	September	Third Quarter
Required production in units of finished goods	68000	74000	78000	220000
Raw materials needed per unit of finished goods	3	3	3	3
Units of raw materials needed to meet production	204000	222000	234000	660000
Add: Desired units of ending raw materials inventory	111000	117000	90000	90000
Total units of raw materials needed	315000	339000	324000	750000
Less: Units of beginning raw materials inventory	102000	111000	117000	102000
Units of raw materials to be purchased	213000	228000	207000	648000

Workings:
Desired units of ending finished goods inventory
July	16400	=2000+(72000*20%)
August	18400	=2000+(82000*20%)
September	14400	=2000+(62000*20%)
October	12400	=2000+(52000*20%)
Desired units of ending raw materials inventory:
July	111000	=222000*50%
August	117000	=234000*50%
September	90000	=60000*3*50%