Direct Materials Purchases Budget

Manufacturing companies must purchase required materials, ingredients and parts to support the planned production; while, merchandising firms (wholesalers and retailers) will purchase finished goods from manufacturers.  

Budgeted Sales + Desired End. Inv. - Beg. Inv. = Required Purchases

Budgeted purchases can be calculated as direct materials needed in planned production, plus the desired ending direct material inventory, minus the beginning direct materials inventory. This fundamental calculation is repeated for each quarter in the manufacturing budget below which references direct materials as "ingredients." The frozen confectionary products require the use of milk, eggs, flavorings, and specialized ingredients for different product types within the category. The direct materials budget starts with required production (shown in previous illustration) levels, then factors in the quantity and type of materials needed to support the budgeted production levels. The second stage of calculation then determines the quantity of direct materials (ingredients) needed for production and calculates the expected cost of the purchases. Note that the desired ending inventory level of 5% is much lower than that used in the production budget calculation, reflecting the need for fresh ingredients which have a limited storage life, unlike finished goods which are frozen.

Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.

 

 

 

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