6.6. Direct Material Budget
When the level of production has been computed, a direct material budget should be constructed to show how much material will be required for production and how much material must be purchased to meet this production requirement.
The purchase will depend on both expected usage of materials and inventory levels. The formula for computation of the purchase is:
- Purchase in units = Usage + Desired ending material inventory units − Beginning inventory units
The direct material budget is usually accompanied by a computation of expected cash payments for materials.
Schedule 3
Quarter | |||||
---|---|---|---|---|---|
1 | 2 | 3 | 4 | Year as a Whole | |
Units to be produced (Sch.2) | 980 | 1,820 | 1,920 | 1,380 | 6,100 |
Material needs per unit (lbs)[] | × 2 | × 2 | × 2 | × 2 | × 2 |
Production needs (usage) | 1,960 | 3,640 | 3,840 | 2,760 | 12,200 |
Desired ending inventory of materials[] | 910 | 960 | 690 | 520[] | 520 |
Total needs | 2,870 | 4,600 | 4,530 | 3,280 | 12,720 |
Less: Beginning inventory of materials | 490[] | 910[] | 960 | 690 | 490 |
Materials to be purchased | 2,380 | 3,690 | 3,570 | 2,590 | 12,230 |
Unit pricey[] | × $5 | × $5 | × $5 | × $5 | × $5 |
Purchase cost | $11,900 | $18,450 | $17,850 | $12,950 | $61,150 |
[] | |||||
[] | |||||
[] | |||||
[] |
[] Given.
[] 25 percent of the next quarter's units needed for production. For example, the 2nd-quarter production needs are 3,640 lbs. Therefore, the desired ending inventory for the 1st quarter would be 25% × 3,640 lbs. = 910 lbs. Also note: 490 lbs = 25% × 1,960 = 490 lbs.
[] Assume that the budgeted production needs in lbs. for the 1st quarter of 20C ...
Get Budgeting Basics and Beyond now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.