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 2,000 units of Supermix plus 20% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 13,000 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 84,000 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. July August September October November December Budgeted Unit Sales 55,000 60,000 70,000 50,000 40,000 30,000 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. Complete this question by entering your answers in the tabs below.

Answer 1

1. Production budget for Supermix for the months July, August, September, and October.
Pearl Production Limited
Production Budget
	July	August	September	October
Budgeted unit sales	55,000	60,000	70,000	50,000
Add: Desired units of ending finished goods inventory [Refer working note 1]	14,000	16,000	12,000	10,000
Total needs	69,000	76,000	82,000	60,000
Less: Units of beginning finished goods inventory          [Refer working note 2]	13,000	14,000	16,000	12,000
Required production in units	56,000	62,000	66,000	48,000

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2. Direct materials budget
Pearl Production Limited
Direct Material Budget
	July		August		September		Third Quarter
Required production in units of finished goods    [Refer production budget]            (a)	56,000		62,000		66,000		184,000
Units of raw materials needed per unit of finished goods                                          (b)	3	cc	3	cc	3	cc	3	cc
Units of raw materials needed to meet production                                                    (a x b)	168,000		186,000		198,000		552,000
Add: Desired units of ending raw materials inventory                               [Refer working note 3]	93,000		99,000		72,000		264,000
Total units of raw materials needed	261,000		285,000		270,000		816,000
Less: Units of beginning raw materals inventory                                       [Refer working note 4]	84,000		93,000		99,000		276,000
Units of raw materials to be purchased	177,000		192,000		171,000		540,000

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Working note 1 - Calculation of desired units of ending finished goods inventory
Equation: Desired units of ending finished goods inventory = 2,000 units + 20% of next month’s sales
Ending finished goods inventory for July                   [2,000 units + Unit sales in August x 20% = 2,000 units + (60,000 units x 20%)]	14,000
Ending finished goods inventory for August               [2,000 units + Unit sales in September x 20% = 2,000 units + (70,000 units x 20%)]	16,000
Ending finished goods inventory for September         [2,000 units + Unit sales in October x 20% = 2,000 units + (50,000 units x 20%)]	12,000
Ending finished goods inventory for October             [2,000 units + Unit sales in November x 20% = 2,000 units + (40,000 units x 20%)]	10,000
Working note 2 - Units of beginning finished goods inventory
Beginning finished goods inventory for July                                                                                                    [Mentioned in question]	13,000
Beginning finished goods inventory for August = Ending finished goods inventory for July                        [Calculated above]	14,000
Beginning finished goods inventory for September = Ending finished goods inventory for August             [Calculated above]	16,000
Beginning finished goods inventory for October = Ending finished goods inventory for September           [Calculated above]	12,000

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Working note 3 - Calculation of desired units of ending raw materials inventory
Equation: Desired units of ending raw materials inventory = Next month’s production needs (in cc) x 0.5 times
Ending raw materials inventory for July                    [August's production need (in cc) x 0.5 = 186,000 cc x 0.5 ]	93,000	cc
Ending raw materials inventory for August               [September's production need (in cc) x 0.5 = 198,000 cc x 0.5 ]	99,000	cc
Ending raw materials inventory for September         [October's production need (in cc) x 0.5 = (Budgeted production in October x 3) x 0.5 = (48,000 x 3) x 0.5 ]	72,000	cc
Working note 4 - Units of beginning raw materals inventory
Beginning raw materials inventory for July                                                                                                    [Mentioned in question]	84,000	cc
Beginning raw materials inventory for August = Ending raw materials inventory for July                       [Calculated above]	93,000	cc
Beginning finished goods inventory for September = Ending raw materials inventory for August             [Calculated above]	99,000	cc