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 14,800 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 90,000 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 59,000 August 64,000 September 74,000 October 54,000 November 44,000 December 34,000 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

PRODUCTION BUDGET

	JULY	AUGUST	SEPTEMBER	OCTOBER
Sales in units	59,000	64,000	74,000	54,000
Add : Desired ending inventory of finished goods	15,800 [3,000+(64,000*20%)]	17,800 [3,000+(74,000*20%)]	13,800 [3,000+(54,000*20%)]	11,800 [3,000+(44,000*20%)]
Total units needed	74,800	81,800	87,800	65,800
Less : Budgeted beginning inventory	(14,800)	(15,800)	(17,800)	(13,800)
Budgeted production in units	60,000	66,000	70,000	52,000

DIRECT MATERIALS BUDGET

	JULY	AUGUST	SEPTEMBER	QUARTER
Budgeted production in units	60,000	66,000	70,000	196,000
Raw material required per unit	3	3	3	3
Raw material required for production	180,000	198,000	210,000	588,000
Add : Desired ending raw materials	99,000 (198,000/2)	105,000 (210,000/2)	78,000 (52,000*3*/2)	78,000
Less : Beginning raw materials	(90,000)	(99,000)	(105,000)	(90,000)
Direct materials to be purchased	189,000	204,000	183,000	576,000