EXERCISE $810$ Production and Direct Materials Budgets LO$83,$ LO$84$

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South

East Asia. Three cubic centimeters $($cc$)$ of solvent H$300$ 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 $20\%$ of the next month$$s sales. The finished goods inventory on June $30$ is

budgeted to be $10,000$ 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 $54,000$ cc of solvent H$300.$

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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.

Quarter

$1234$ Year

Cash balance, beginning $......................$ $ $6$ $ $?$ $ $?$ $ $?$ $ $?$

Add collections from customers $................??96?323$

Total cash available $...........................71????$

Less disbursements:

Purchase of inventory $.......................3545?35?$

Selling and administrative expenses $..........?3030?113$

Equipment purchases $.......................8810?36$

Dividends $.................................2222?$

Total disbursements $..........................?85???$

Excess $($deficiency$)$ of cash available

over disbursements $........................(2)?11??$

Financing:

Borrowings $................................?15?$

Repayments $($including interest$)*..............(?)(17)(?)$

Total financing $...............................?????$

Cash balance, ending $.........................$ $ $?$ $ $?$ $ $?$ $ $?$ $ $?$

$*$Interest will total $$1,000$ for the year.

Budgeted

Unit Sales

July $........................35,000$

August $.....................40,000$

September $.................50,000$

October $....................30,000$

November $..................20,000$

December $..................10,000$

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 H$300$ to be purchased for

July, August, and September, and for the quarter in total.