Question

EXERCISE 8-10 Production and Direct Materials Budgets L08-3, 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: 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 Master Budgeting 439 a. b. budgeted to be 10,000 units. The raw materials inventory on hand at the end of each month must equal one-half of the fol- lowing month's production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 54,000 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 C. Unit Sales July August.. September October.. November December.. 35,000 40,000 50,000 30,000 20,000 10,000 Required: 1. Prepare a production budget for Supermix for the months July, August, September, and October. 2. Examine the production budget that you prepared in (1) above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in 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. in 108-8 1009 omitted). The company

Answer 1

Answer:

Requirement -1 :

Production Budget
Working		July	August	September	October
A (given)	Budgeted Sales Units	35,000	40,000	50,000	30,000
B=3,000 + 20% of next month's sales units	Closuing Inventory in units	11,000	13,000	9,000	3,000
C = Closing of previous month	Opening Units	10,000	11,000	13,000	9,000
D=A+B-C	To be Produced (units)	36,000	42,000	46,000	24,000

Requirement -2 :

• The above production budget shows how expected closing inventory and budgeted sales affects the units that are to be produced in a month.
• In July & August, the company produced more units than it actually sold, and in September and October, it produced lesser than what was sold. There can be several reasons ,like

- To match the production with the demanded units durng peak season (September)

- To Maintain the expected budgeted closing inventory of the finished stock.

- To have availability of safe stock.

Requirement -3 :

Direct Material Budgeted
Working		July	August	September	October
A	To be Produced (units)	36,000	42,000	46,000	24,000
B	H300 per unit (cc)	3	3	3	3
C=A*B	H300 required (in cc)	108,000	126,000	138,000	372,000
D = 50% of next month requirement	Closuing Inventory	63,000	69,000	42,000	42,000
E = Closing of previous month	Opening Inventory	54,000	63,000	69,000	54,000
F=C+D-E	Raw Material to be purchased	117,000	132,000	111,000	360,000