Budgeting Basics and Beyond

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

Table 6.3. THE PUTNAM COMPANY Sales Budget For the Year Ended December 31, 20B

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 ...