Question

Exercise 8-10 Production and Direct Materials Budgets [LO8-3, LO8-4]

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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 20,250 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 111,375 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	73,000
August	78,000
September	88,000
October	68,000
November	58,000
December	48,000

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

1) Production Budget

	July	August	september	October
Unit Sales	73000	78000	88000	68000
Add: Desired ending inventory	21500	24000	19000	16500
Total	94500	102000	107000	84500
Less: Beginning inventory	-20250	-21500	-24000	-19000
Production unit	74250	80500	83000	65500

2) Raw material budget

	July	August	September	Quarter
Unit produced	74250	80500	83000	237750
Raw material per unit needed for production	3	3	3	3
Raw material needed for production	222750	241500	249000	713250
Add: Desired ending inventory	120750	124500	98250	98250
Total	343500	366000	347250	811500
Less: Beginning inventory	-111375	-120750	-124500	-111375
Raw material to be purchased	232125	245250	222750	700125