Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 12,400 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 72,000 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	47,000
August	52,000
September	62,000
October	42,000
November	32,000
December	22,000

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. Prepare a production budget for Supermix for the months July, August, September, and October.

Production Budget for Supermix
Particulars	July	August	September	October
Opening Finished Goods (In units)	12,400	13,400	15,400	11,400
Sales (in units)	47,000	52,000	62,000	42,000
Closing Stock (in units) (WN -1)	13,400	15,400	11,400	9,400
Production (In units)	48,000	54,000	58,000	40,000
(= Closing stock + sales - Opening stock)
Working Note 1 : Calculation of closing stock
	July	August	September	October	November	December
Budgeted sales	47,000	52,000	62,000	42,000	32,000	22,000
Closing Stock (3000 units + 20% of sales of next month)	13,400	15,400	11,400	9,400	7,400

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.

Raw material budget - H300
Particulars	July	August	September
Opening stock (In CC)	72,000	81,000	87,000
Raw material required for production (WN-2)	1,44,000	1,62,000	1,74,000
Closing Stock (in CC) (WN -3)	81,000	87,000	60,000
Raw materials to be purchased	1,53,000	1,68,000	1,47,000
( Closing stock + RM required for production - Opening stock)
Working Note 2 : Raw material required for production
	July	August	September	October
Production on supermix (in units)	48,000	54,000	58,000	40,000
Raw materials required for production (in CC)	1,44,000	1,62,000	1,74,000	1,20,000
(Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix)
Working Note 3 : Calculation of Closing stock of Raw Materials
	July	August	September	October
Raw materials required for production (in CC)	1,44,000	1,62,000	1,74,000	1,20,000
Closing stock (in CC)	81000	87000	60000
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