1. Production budget:

		July	August	Septem-ber	October
	Budgeted unit sales................
	Add desired units of ending finished goods inventory*....
	Total needs............................
	Less units of beginning finished goods inventory......
	Required production in units...

* October: 3,000 units + (20,000 units 20%) = 7,000 units.

2. During July and August, the company is building inventories in anticipation of peak sales in September. Therefore, production exceeds sales during these months. In September and October, inventories are being reduced in anticipation of a forthcoming decrease in sales. Therefore, production is less than sales during these months.

Exercise 8-10 (continued)

3. Direct materials budget:

	July	August	Septem-ber		Third Quarter
Required production in units of finished goods.....
Units of raw materials needed per unit of finished goods................................................................
Units of raw materials needed to meet production
Add desired units of ending raw materials inventory...........................................................
Total units of raw materials needed......................
Less units of beginning raw materials inventory....
Units of raw materials to be purchased.................

* 28,000 units (October production) 3 cc per unit = 84,000 cc; 84,000 cc 1/2 = 42,000 cc.

As shown in part (1), production is greatest in September; however, as shown in the raw material purchases budget, purchases of materials are greatest a month earlierin August. The reason for the large purchases of materials in August is that the materials must be on hand to support the heavy production scheduled for September.

EXERCISE 8-10 Production and Direct Materials Budgets L08-3, L08-4 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: a. b. 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. 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 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 Examine the production budget that you prepared in (1) above. Why will the company pro- duce 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