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 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 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,800 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 60,000 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	39,000
August	44,000
September	54,000
October	34,000
November	24,000
December	14,000
1. Prepare a production budget for Supermix for the months July, August, September, and October. 2. 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

1. Production Budget-

Particulars	July	August	September	October
Budgeted sales	39,000	44,000	54,000	34,000
Add: Desired ending inventory	12,800	14,800	10,800	8,800
Total needs	51,800	58,800	64,800	42,800
Less: Beginning inventory	(11,800)	(12,800)	(14,800)	(10,800)
Required production	40,000	46,000	50,000	32,000

Desired ending inevntory -

July= 4,000 + (20% * 44,000) = 12,800

August = 4,000 + (20% *54,000) = 14,800

September = 4,000 + (20% * 34,000) = 10,800

October = 4,000 + (20% * 24,000) = 8,800

2. Direct materials budget-

Particulars	July	August	September	Total
Required production	40,000	46,000	50,000	136,000
Material needed per unit	2cc	2cc	2cc	2cc
Production needs	80,000	92,000	100,000	272,000
Add: Desired ending inventory	46,000	50,000	32,000	32,000
Total material needs	126,000	142,000	132,000	304,000
Less: Beginning inventory	(40,000)	(46,000)	(50,000)	(40,000)
Materail purchases	86,000	96,000	82,000	264,000