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: a.The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 15,250 units. b.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 69,375 cc of solvent H300. c.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 45,000 August 50,000 September 60,000 October 40,000 November 30,000 December 20,000 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 for Supermix:-

	July	August	September	October
Budgeted Sales	45000	50000	60000	40000
(+) Ending Inventory	(4000 + {50000 * 25%}) =16500	(4000 + {60000 * 25%}) =19000	(4000 + {40000 * 25%}) =14000	(4000 + {30000 * 25%}) =11500
(-) Beginning Inventory	15250	16500	19000	14000
Production Budget	46250	52500	55000	37500

(2) Direct Material Purchase Budget :-

	July	August	September	Quarter
Direct Material required for production of FG	(46250 * 3) =138750	(52500 * 3) =157500	(55000 * 3) =165000	461250
(+)Ending Inventory	(157500/2) =78750	(165000/2) =82500	*(112500/2) =56250
(-)Beginning Inventory	69375	78750	82500
Direct Material Purchase Budget	148125	161250	138750	448125

*October Direct material required for production = (37500 * 3) = 112500