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:

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

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 54,000 cc of solvent H300.

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	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

• All working forms part of the answer
• Requirement 1

Working		July	August	September	October
A	Budgeted Sales Units	35000	40000	50000	30000
B = 3000 + (20% of next month's 'A')	Add: Desired ending Inventory of finished goods	11000	13000	9000	7000
C=A+B	Total requirements	46000	53000	59000	37000
D	Less: Beginning Inventory	10000	11000	13000	9000
E = C-D	Budgeted Units to be produced	36000	42000	46000	28000

• Requirement 2

Working		July	August	September	Quarter
1	Budgeted Units to be produced	36000	42000	46000	124000
2	Raw material required per unit (cc)	3	3	3	3
A= 1 x 2	Requirement for production (cc)	108000	126000	138000	372000
B = 50% of next month's 'A')	Add: Desired inventory ending stock	63000	69000	42000	42000
C=A+B	Total needs (cc)	171000	195000	180000	414000
D	Less: Beginning raw material inventory	54000	63000	69000	54000
E = C-D	Total raw material to be purchased (cc)	117000	132000	111000	360000