Question

Exercise 8-10 (Algo) 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 is planning its 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 3,000 units of Supermix plus 25% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 16,250 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 81,375 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 53,000 58,000 68,000 48,000 38,000 28,000 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

С D E August September 58,000 68,000 20,000 15,000 78,000 83,000 17,500 20,000 60,500 63,000 October 48,000 12,500 60,500 15,000 45,500 A B 1 Pearl Products Limited 2 Production budget 3 July 4 Budgeted unit sales 53,000 5 Add: Desired units of ending finished goods Inventory 17,500 6 Total needs 70,500 7 Less: Units of beginning finished goods Inventory 16,250 8 Required production in units 54,250 9 10 Pearl Products Limited 11 Direct Materials Budget July 13 Required production in units of finished goods 54,250 14 Units of raw materials needed per unit of finished goods 3 15 Units of raw materials needed to meet production 162,750 16 Add: Desired Ending raw materials Inventory 90,750 17 Total units of raw materials needed 253,500 18 Less : Beginning raw materials Inventory 81,375 19 Units of raw materials to be purchased 172,125 12 August September Third Quarter 60,500 63,000 177,750 3 3 3 181,500 189,000 533,250 94,500 68,250 68,250 276,000 257,250 601,500 90,750 94,500 81,375 185,250 162,750 520,125

D A B с E 1 Pearl Products Limited 2 Production budget 3 July August September October 4 Budgeted unit sales 53000 58000 68000 48000 5 Add: Desired units of ending finished goods Inventory =3000+(C4*25%) =3000+(D4*25%) =3000+(E4*25%) =3000+(38000*25%) 6 Total needs =+B4+B5 =+C4+C5 =+D4+D5 =+E4+E5 7 Less: Units of beginning finished goods Inventory 16250 =+B5 =+C5 =+D5 8 Required production in units =+B6-B7 =+C6-C7 =+D6-D7 =+E6-E7 9 10 Pearl Products Limited 11 Direct Materials Budget 12 July August September Third Quarter 13 Required production in units of finished goods =+B8 =+C8 =+D8 =+B13+C13+D13 14 Units of raw materials needed per unit of finished goods 3 3 3 3 15 Units of raw materials needed to meet production =+B13*B14 =+C13*C14 =+D13*D14 =+E13*E14 16 Add: Desired Ending raw materials Inventory =+C15*50% =+D15*50% =+E8*3*50% =+D16 17 Total units of raw materials needed =+B15+B16 =+C15+C16 =+D15+D16 =+E15+E16 18 Less : Beginning raw materials Inventory 81375 =+B16 =+C16 =+B18 19 Units of raw materials to be purchased =+B17-B18 =+C17-C18 =+D17-018 =+E17-18