Pearl Products sells toys. Three ounces of dye are required to manufacture each unit of Supermix, one of the company's products. The company is now planning raw material needs for the third quarter, the quarter peak in which peak sales of Supermix occur. To keep production and sales smooth, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 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 be equal to one-half of the following month's production needs for raw materials. The raw materials inventory on June 30 is budgeted to be be 54,000 ounces of dye.
c. The company maintains no work in progress inventory. A sales budget for Supermix for the last six months is as follows:
Budgeted Sales in Units
1. Prepare a production budget for Supermix for the months of 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 dye to be purchased for July, August, and September, and for the quarter total.
The solution performs cost accounting for Pearl Products.