Direct Material Purchases Budget
Direct material purchases budget shows budgeted beginning and ending direct material inventory, the quantity of direct material that will be used in production, the amount of direct material that must be purchased and its cost during a specific period. Direct material purchases budget is a component of master budget and it is based on the following formula:
Budgeted Direct Material Purchases in Units
= Budgeted Beginning Direct Material in Units
+ Direct Material in Units Needed for Production
− Budgeted Ending Direct Material in Units
In the above formula, the direct material in units that is needed for production is calculated as follows:
Budgeted Production During the Period
× Units of Direct Material Required per Unit
= Direct Material in Units Needed for Production
Since the budgeted production figure is provided by the production budget, the direct material purchases budget can be prepared only after the preparation of production budget.
Format and Example
The following example shows the format of a simple direct material purchases budget. The budgeted production figures are obtained from the production budget of Company A. Note that the budgeted ending direct material of 1st, 2nd and 3rd period is the beginning direct material in 2nd, 3rd and 4th period respectively.
| Company A | |||||
| Direct Material Purchases Budget | |||||
| For the Year Ending December 30, 2010 | |||||
| Quarter | |||||
| 1 | 2 | 3 | 4 | Year | |
| Budgeted Production in Units | 1,334 | 912 | 1,148 | 1,778 | 5,172 |
| × DM Required per Unit (lb.) | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 |
| DM Required of Production (lb.) | 5,336 | 3,648 | 4,592 | 7,112 | 20,688 |
| + Budgeted Ending DM (lb.) | 547 | 689 | 1,068 | 961 | 961 |
| − Beginning Direct Material (lb.) | −800 | −547 | −689 | −1,068 | −800 |
| Budgeted DM Purchases (lb.) | 5,083 | 3,790 | 4,971 | 7,005 | 20,849 |
| Cost per Pound | $3.10 | $3.20 | $3.50 | $4.00 | |
| Budgeted DM Purchases in $ | $15,757 | $12,128 | $17,398 | $28,020 | $73,304 |
by Irfanullah Jan, ACCA and last modified on