Question

Exercise 7-10 Production and Direct Materials Budgets [LO7-3, LO7-4]

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 now 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:

a.	The finished goods inventory on hand at the end of each month must be equal to 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,250 units.
b.	The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 57,375 cc of solvent H300.
c.	The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
July	37,000
August	42,000
September	52,000
October	32,000
November	22,000
December	12,000

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) Statement showing production budget for Supermix? (in units)

Particulars	July	August	September	October
Budgeted Sales	37,000	42,000	52,000	32,000
Add: Ending Inventory (2,000+25% of next month sales)	12,500	15,000	10,000	7,500
Less: Beginning Inventory	(11,250)	(12,500)	(15,000)	(10,000)
Required Production of Supermix	38,250	44,500	47,000	29,500

2) Direct Materials Budget (in Cubic centimeters)

Particulars	July	August	September	Quarter
1) Required production of Supermix	38,250	44,500	47,000	129,750
2) Quantity of solvent H300 required per unit	3 cc	3 cc	3 cc	3 cc
3) Total material required for production (1*2)	114,750	133,500	141,000	389,250
4) Desired Ending raw material (50% of next month material required for production)	66,750	70,500	*44,250	44,250
5) Beginning Raw materials	(57,375)	(66,750)	(70,500)	(57,375)
6) Raw Material required to be purchased (3+4-5)	124,125	137,250	114,750	376,125

* Material Required for October = 29,500 units*3 cc = 88,500 cc

Desired Ending raw materials for September = 88,500*50% = 44,250 cc