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 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,200 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 108,000 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	71,000
August	76,000
September	86,000
October	66,000
November	56,000
December	46,000

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
Sales	71000	76000	86000	66000
Add: Desired ending inventory	18200	20200	16200	14200
Total	89200	96200	102200	80200
Less: Beginning inventory	-17200	-18200	-20200	-16200
Production units	72000	78000	82000	64000

2) Direct material budget

	July	August	September	Quarter
Production units	72000	78000	82000	232000
Direct material per unit	3	3	3	3
Direct material used in production	216000	234000	246000	696000
Add: Desired ending inventory	117000	123000	96000	96000
Total needs	333000	357000	342000	792000
Less: Beginning inventory	-108000	-117000	-123000	-108000
Direct material purchase	225000	240000	219000	684000