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 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,600 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 66,000 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	43,000
August	48,000
September	58,000
October	38,000
November	28,000
December	18,000

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
Budgeted sales	43000	48000	58000	38000
Add: ending inventory	19600 (2000+(48000*20%))	13600 (2000+(58000*20%))	9600 (2000+(38000*20%))	7600 (2000+(28000*20%))
Less: beginning inventory	10600 (2000+(43000*20%))	19600	13600	9600
Units to be produced	52000	42000	54000	36000

Units to be produced in November = 28000+(2000+(18000*20%))+7600 = 26000

Direct materials budget

	July	August	September	October
Units to be produced	52000	42000	54000	36000
Raw material per unit	3	3	3	3
Raw materials required	156000	126000	162000	108000
Add: ending inventory	63000 (126000*0.5)	81000 (162000*0.5)	54000 (108000*0.5)	39000 (78000*0.5)
Less : Beginning inventory	66000	63000	81000	54000
Raw materials to be purchased	153000	144000	135000	93000

Raw materials required in November = 26000*3 = 78000