If we use ArtCraft Pottery as our example, which comes from the article on Budgeting - How to Develop the Operating Budget, the following information can be used to develop the direct materials purchases budget:
Information
The following budgeted units of pottery are to be produced each quarter: 1,060, 1,260, 1,600, and 1,800. Plain pottery is $3 per unit and the color for the pottery is $0.20 per ounce. On a per-unit basis, the factory needs one pound of clay and five ounces of the color to produce the final piece. ArtCraft Pottery's policy is to have 10% of the following quarter's production needs in ending inventory. The factory has 58 pounds of clay and 390 ounces of color on hand on January 1. At the end of the year, the desired ending inventory is 106 pounds of clay and 530 ounces of color.
What do we solve for? We calculate the ending inventory of clay and color for quarters 2 and 3. Second, we prepare a direct materials purchases budget for both clay and color.
Calculation of Ending Inventory for clay and color for Quarters 2 and 3
Ending Inventory clay, quarter 2 = 0.10 (1,600 units X 1 unit clay) = 160
Ending inventory clay, quarter 3 = 0.10 (1,800 units X 1 unit clay) = 190
Ending inventory color, quarter 2 = 0.10 (1,600 units X 5 ounces) = 800
Ending Inventory color, quarter 3 = 0.10 (1,800 units X 5 ounces) = 900
><You now have the units of each component to manufacture the pottery that you need. You can see, however, that if a product was more complicated and needed a lot of different raw materials, this calculation would be massive. In this simple example, we have the information to calculate the direct materials purchases budgets.
The table was developed from a simple accounting equation you are probably familiar with:
Raw Materials Required for production + Ending Inventory = Total Raw Materials Required
Beginning Raw Materials Inventory - Raw Materials to be Purchased
*Table Developed Compliments of Cornerstones of Managerial Accounting, 3rd ed.
ArtCraft Pottery - *Direct Material Purchases Budget
| Quarter | ||||||
| Clay for Pottery | ||||||
| Clay | 1 | 2 | 3 | 4 | Year | |
| Units to be Produced | 1,060 | 1,260 | 1,600 | 1,800 | 5,720 | |
| Direct Materials Per Unit | x1 | x1 | x1 | x1 | x1 | |
| Production Needs | 1,060 | 1,260 | 1,600 | 1,800 | 5,720 | |
| Desired Ending Inventory | 126 | 160 | 180 | 106 | 106 | |
| Total Needs | 1,186 | 1,420 | 1,780 | 1,906 | 5,826 | |
| Less: Beginning Inventory | (58) | (126) | (160) | (180) | (58) | |
| Direct Materials to be Purchased | 1,128 | 1,294 | 1,620 | 1,726 | 5,768 | |
| Cost of clay | x$3 | x$3 | x$3 | x$3 | x$3 | |
| Total Purchase Cost of Clay | $3,384 | $3,882 | $4,860 | $5.178 | $17,304 |