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 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 15,250 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 69,375 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	45,000
August	50,000
September	60,000
October	40,000
November	30,000
December	20,000

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

Ans. 1	PEARL   PRODUCTS LIMITED
	Production Budget
		July	August	September	October
	Budgeted unit sales	45,000	50,000	60,000	40,000
	Add: Desired units of ending finished goods inventory	16,500	19,000	14,000	11,500
	Total needs	61,500	69,000	74,000	51,500
	Less: Units of beginning finished goods inventory	-15,250	-16,500	-19,000	-14,000
	Required production in units	46,250	52,500	55,000	37,500
*Calculations for Ending inventory:				*Calculations for Beginning inventory:
Months				Months
July	4,000 + (50,000 * 25%)	16500		July	Ending inventory of June	15,250
August	4,000 + (60,000 * 25%)	19000		August	Ending inventory of July	16500
September	4,000 + (40,000 * 25%)	14000		September	Ending inventory of August	19000
October	4,000 + (30,000 * 25%)	11500		October	Ending inventory of September	14000
	*Ending inventory of previous month = Beginning inventory for current month
Ans.   3	PEARL   PRODUCTS LIMITED
	Direct Materials Budget
		July	August	September	Third Quarter
	Units of raw materials needed to meet production	138750	157500	165000
	Add: Desired units of ending raw materials inventory	78750	82500	56250
	Total units of raw materials needed	217500	240000	221250
	Less: Units of beginning raw materials inventory	-69375	-78750	-82500
	Units of raw materials to be purchased	148125	161250	138750	448125
	*Calculations for Units of raw materials needed to meet production:
		July	August	September	October
	Budgeted production (units)	46,250	52,500	55,000	37,500
	(X) Materials requirement per unit	3	3	3	3
	Units of raw materials needed to meet production	138750	157500	165000	112500
	*Calculations for Ending inventory:			*Calculations for Beginning inventory:
Months			Months
July	157,500 * 1/2	78750	July	Ending inventory of June	69375
August	165,000 * 1/2	82500	August	Ending inventory of July	78750
September	112,500 * 1/2	56250	September	Ending inventory of August	82500
	*Ending inventory for current month   =   Units of raw materials needed to meet production * 1/2
	*Beginning inventory for current month   =   Ending inventory for previous month