Question

Exercise 8-10 Production and Direct Materials Budgets [LO8-3, LO8-4]

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:

1. 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 20,250 units.

2. 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 111,375 cc of solvent H300.

3. 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	73,000
August	78,000
September	88,000
October	68,000
November	58,000
December	48,000

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

Budgeted Unit Sales
July	73,000
August	78,000
September	88,000
October	68,000
November	58,000
December	48,000
Finished goods Inventory on 30th June	20,250
25 % of July sales	73000x25%	18250
Additional supemix required		2000
July Sales		73000
August Sales		78000
25% August sales	78000x25%	19500
July production required	73000-20250+19500+2000	74250
ie July sales-inventory in opening+25% inventory of August+additional required
September sales		88000
25% of September Sales	88000x25%	22000
August Sales		78000
August production required	78000-21500+22000+2000	80500
ie August sales-inventory in opening+25% inventory of September+additional required
October sales		68000
25% of October Sales	68000x25%	17000
September sales		88000
Additional supemix required		2000
September production required	88000-24000+17000+2000	83000
ie September sales-inventory in opening+25% inventory of October
November Sales		58000
25% of November Sales	58000x25%	14500
October sales		68000
October production required	68000-19000+14500+2000	65500
ie October sales-inventory in opening+25% inventory of November
Raw material Inventory Solvent H 300 is budgeted on June 30	111375	CC
Solvent 300 to be purchased
July production required	73000-18250+19500	74250
Opening Inventory(June Purchase)		111375
Balance material required for July production	(74250x3-111375)	111375
Material required for August production	(80500x3/2)	120750
July Raw material purchase		232125
August production required	78000-19500+22000	80500
Opening Inventory(July purchase)		120750
Balance material required for August production	(80500x3-120750)	120750
Material required for September production	(83000x3/2)	124500
August Raw material purchase		245250
September production required	88000-22000+17000	83000
Opening Inventory(August purchase)		124500
Balance material required for August production	(83000x3-124500)	124500
Material required for October Production	(65500x3/2)	98250
September Raw material purchase		222750