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) |
790 x3 |
720 x3 |
890 x3 |
820 x3 |
3,220 x3 |
Total needs Desired ending inventory of materials |
2,370 216 |
2,160 267 |
2,670 246 |
2,460 250 |
9,660 250 |
Total production needs Less: beginning inventory |
2,586 237 |
2,427 216 |
2,916 267 |
2,710 246 |
9,910 237 |
Material to be purchased Purchase cost |
2,349 x2 |
2,211 x2 |
2,649 x2 |
2,464 x2 |
9,673 x2 |
Purchase cost |
4,698 |
4,422 |
5,298 |
4,928 |
19,346 |
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 |
2,200 |
|
|
|
2,200 |
1st qtr purchases |
2,349 |
2,349 |
|
|
4,698 |
2d qtr purchases |
|
2,211 |
2,211 |
|
4,422 |
3d qtr purchases |
|
|
2,649 |
2,649 |
5,298 |
4th qtr purchases |
|
|
|
2,464 |
2,464 |
Total disbursements |
4,549 |
4,560 |
4,860 |
5,113 |
19,082 |