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 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,000 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 54,000 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	35,000
August	40,000
September	50,000
October	30,000
November	20,000
December	10,000

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

Required 1 :
Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	35000	40000	50000	30000
(+) Desired units of ending finished goods inventory ( 3000 + 20% of next month's sales )	11000 [ 3000+(20%*40000) ]	13000 [ 3000+(20%*50000) ]	9000 [ 3000+(20%*30000) ]	7000 [ 3000+(20%*20000) ]
Total needs	46000	53000	59000	37000
(-) Units of Beginning finished goods inventory	10000	11000	13000	9000
Required production in units	36000	42000	46000	28000

Required 2 :
Pearl Products Limited
Direct materials budget
	July		August		September		Third Quarter
Required production in units	36000		42000		46000		124000
Units of raw materials needed per unit of finished goods	3	cc	3	cc	3	cc	3	cc
Units of raw materials needed to meet production	108000		126000		138000		372000
(+) Desired units of ending raw materials inventory ( One-half of following month's production needs )	63000 [ 1/2*126000 ]		69000 [ 1/2*138000 ]		42000 [ Refer Note ]		42000
Total units of raw materials needed	171000		195000		180000		414000
(-) Units of Beginning raw materials inventory	54000		63000		69000		54000
Units of raw materials to be purchased	117000		132000		111000		360000

Note : September's ending inventory = 1/2 * October month's production needs = 1/2 * ( 28000 * 3 )

42000