The direct materials budget

Having computed the level of production, we must prepare the direct materials budget in order to know how much material will be required and how much of it must be purchased to meet production requirements. The purchase will depend on both expected usage of materials and inventory levels. We assume that the ending inventory in each quarter is 10 % of next quarter's production needs and that ending materials inventory for the fourth quarter is 250 units. In order to quantify the number of units to be produced and the cost in monetary units, we assume that 3 kg. of materials are needed per unit of product at a cost of 2,000 UAH per kg.

SCHEDULE 3 ALFA Company - 2010 Direct materials budget

	Quarter
	1	2	3	4	TOTAL
Units to be produced material needs per unit (kg)
Total needs Desired ending inventory of materials
Total production needs Less: beginning inventory
Material to be purchased Purchase cost
Purchase cost

Assuming that 50% of each quarter's purchases are paid in the quarter, with the remainder being paid in the following quarter, we can calculate the schedule of expected cash disbursements for direct materials purchases.

SCHEDULE 3 ALFA Company - Schedule of expected cash disbursements

	Quarter
	1	2	3	4	TOTAL
Accounts payable at the beginning of year
1st qtr purchases
2d qtr purchases
3d qtr purchases
4th qtr purchases
Total disbursements