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 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,250 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 93,375 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	61,000
August	66,000
September	76,000
October	56,000
November	46,000
December	36,000

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).

Production Budget
	July	August	September	October
Budgeted sales (units)	61000	66000	76000	56000
Add: Desired ending inventory	18500	21000	16000	13500
Total need	79500	87000	92000	69500
Less: Beginning inventory	17250	18500	21000	16000
Required production	62250	68500	71000	53500

(2).

Direct materials budget
	July	August	September	Quarter
Required production (units)	62250	68500	71000	201750
Material H300 needed per unit	3	3	3	3
Production needs	186750	205500	213000	605250
Add: Desired ending inventory	102750	106500	80250	80250
Total material H300 needs	289500	312000	293250	685500
Less: Beginning inventory	93375	102750	106500	93375
Material H300 purchases	196125	209250	186750	592125