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:

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 11,250 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 57,375 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	37,000
August	42,000
September	52,000
October	32,000
November	22,000
December	12,000

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

Solution :

(1) Production Budget :

Particulars	July	August	September	October
(a) Budgeted Unit Sales	37,000	42,000	52,000	32,000
(b) Desired Inventory at the end	12,500	15,000	10,000	7,500
(c) Total Needs (a + b)	49,500	57,000	62,000	39,500
(d) Opening Inventory	11,250	12,500	15,000	10,000
(e) Required Production in Units (c - d)	38,250	44,500	47,000	29,500

Desired Inventory at the end of the month :

July : 2,000 + ( 42,000 * 0.25) = 12,500

Aug : 2,000 + ( 52,000 * 0.25) = 15,000

Sep : 2,000 + ( 32,000 * 0.25) = 10,000

Oct : 2,000 + ( 22,000 * 0.25) = 7,500

(2) Direct Material Budget :

Particulars	July	August	September	Third Quarter
(a) Required Production in Units	38,250	44,500	47,000	129,750
(b) Unit of Raw Material Required per Unit of Finished Goods	3 CC	3 CC	3 CC	3 CC
(c) Units of Raw Material Needed to Meet Production ( a * b)	114,750	133,500	141,000	389,250
(d) Desired Raw Material Units at the end of the month	66,750	70,500	44,250	44,250
(e) Total Units of Raw Material Needed (c +d )	181,500	204,000	185,250	433,500
(f) Opening Units of Raw Material	57,375	66,750	70,500	57,375
(g) Units of Raw Material to be Purchased ( e-f)	124,125	137,250	114,750	376,125

Desired Raw Material Units at the end of the month :

July : 133,500 * 0.50 = 66,750

Aug : 141,000 * 0.50 = 70,500

Sep : 29,500 * 3 * 0.50 = 44,250