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 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 19,000 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 114,000 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	75,000
August	80,000
September	90,000
October	70,000
November	60,000
December	50,000

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

Solution

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	75000	80000	90000	70000
Desired Ending Finished Inventory	20000	22000	18000	16000
Total Units needed	95000	102000	108000	86000
Less : Beginning Finished Inventory	19000	20000	22000	18000
Units to be Produced	76000	82000	86000	68000

.

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	76000	82000	86000	244000
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	228000	246000	258000	732000
Budgeted ending inventory (cc.)	123000	129000	102000*	102000
Total materials requirements (cc.)	351000	375000	360000	834000
Beginning inventory (cc.)	114000	123000	129000	114000
Materials to be purchased (cc.)	237000	252000	231000	720000

*(68000*3)*50%