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 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 14,250 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 75,375 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	49,000
August	54,000
September	64,000
October	44,000
November	34,000
December	24,000

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:

Part 1 – Production Budget

Production Budget
	July	August	September	October	November
Expected Sales Units	49,000	54,000	64,000	44,000	34,000
Plus: Desired Ending Inventory (2,000 units + 25% of Next Month's Sales)	15,500	18,000	13,000	10,500
Total Units needed	64,500	72,000	77,000	54,500
Less: Expected Beginning Inventory	14,250	15,500	18,000	13,000
Production Budget in Units	50,250	56,500	59,000	41,500

Part 2 --- Direct Material Budget for Solvent H300

Production Budget
	July	August	September	Quarter	October
Budgeted Production Units (Refer Part 1)	50,250	56,500	59,000		41,500
Raw material H300 required per unit (cc)	3	3	3		3
Raw material H300 required for production (cc)	150,750	169,500	177,000		124,500
Plus: Desired Ending Inventory Raw material	84,750	88,500	62,250		#REF!
Total raw materials need	235,500	258,000	239,250
Less: Beginning H300 Inventory	75,375	84,750	88,500
Raw material H300 to be purchased	160,125	173,250	150,750	484,125

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