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 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 16,600 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 96,000 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	63,000
August	68,000
September	78,000
October	58,000
November	48,000
December	38,000

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. Prepare a production budget for Supermix for the months July, August, September, and October

	July	August	September	October
Sales Unit	63000	68000	78000	58000
Add: Desired ending inventory	17600	19600	15600	13600
Total	80600	87600	93600	71600
Less: Beginning inventory	-16600	-17600	-19600	-15600
Production	64000	70000	74000	56000

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.

	July	August	September	Quarter
Production units	64000	70000	74000	208000
Raw material per unit	3	3	3	3
Raw material needed for production	192000	210000	222000	624000
Add: Desired ending inventory	105000	111000	84000	84000
Total	297000	321000	306000	708000
Less: Beginning inventory	-96000	-105000	-111000	-96000
Purchase units	201000	216000	195000	612000