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 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 18,250 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 87,375 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	57,000
August	62,000
September	72,000
October	52,000
November	42,000
December	32,000

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

Ans :

Production budget

Particulars	July	August	September	October	November	December
Sales (A)	57000	62000	72000	52000	42000	32000
Ending Inventory as per policy	4000+25%*62000	4000+25%*72000	4000+25%*52000	4000+25%*42000	4000+25%*32000
Ending Inventory (B)	19500	22000	17000	14500	12000
Opening Inventory(Note 1) (C )	18250	19500	22000	17000	14500	12000
Production (A+B-C)	58250	64500	67000	49500	39500

Particulars	July	August	September	October
Production (A+B-C)	58250	64500	67000	49500

3. Direct material budget

	July	August	September	October	November
Production	58250	64500	67000	49500	39500
Raw material to be consumed (3cc per unit) (D)	174750	193500	201000	148500	118500
Ending raw material( half of next months production requirment of raw materials	193500/2	201000/2	148500/2	118500/2
Ending raw material (E )	96750	100500	74250	59250
Beginning raw material (F)	87375	96750	100500	74250
Direct material to be purchased (D+E-f)	184125	197250	174750	133500

	July	August	September	Total
Direct material to be purchased (D+E-f)	184125	197250	174750	556125