EXERCISE 8–13 Production and Direct Materials Budgets [LO3, LO4] Tonga Toys manufactures and distributes a number of products to retailers. One of these products, Playclay, requires three pounds of material A135 in the manufacture of each unit. The company is now planning raw materials needs for the third quarter—July, August, and September. Peak sales of Playclay occur in the third quarter of each year.

To keep production and shipments moving smoothly, the company has the following inventory requirements:

a. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 30% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,000 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 for material A135 is budgeted to be 64,500 pounds.

c. The company maintains no work in process inventories. A sales budget for Playclay for the last six months of the year follows. Budgeted Sales in Units July . . . . . . . . . . . . . . . . . . . . . . 40,000 August . . . . . . . . . . . . . . . . . . . . 50,000 September . . . . . . . . . . . . . . . . . 70,000 October. . . . . . . . . . . . . . . . . . . 35,000 November . . . . . . . . . . . . . . . . . 20,000 December. . . . . . . . . . . . . . . . . 10,000

Required:

1. Prepare a production budget for Playclay for the months July, August, September, and October.

2. Examine the production budget that you prepared. Why will the company produce more units than it sells in July and August and less units than it sells in September and October?

3. Prepare a direct materials budget showing the quantity of material A135 to be purchased for July, August, and September and for the quarter in total.