1. Money

How to Prepare a Direct Materials Purchases Budget

The Direct Materials Purchases Budget as a Part of the Operating Budget

By

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
Clay1234Year
Units to be Produced1,0601,2601,6001,8005,720
Direct Materials Per Unit x1x1x1x1x1
Production Needs1,0601,2601,6001,8005,720
Desired Ending Inventory126160180106106
Total Needs1,1861,4201,7801,9065,826
Less: Beginning Inventory(58)(126)(160)(180)(58)
Direct Materials to be Purchased1,1281,2941,6201,7265,768
Cost of clayx$3x$3x$3x$3x$3
Total Purchase Cost of Clay$3,384$3,882$4,860$5.178$17,304

©2014 About.com. All rights reserved.