Direct Materials Purchases Budget | Preparation | Formulas

The production budget is the starting point for determining the estimated quantities of direct materials to be purchased. Multiplying these quantities by the expected unit purchase price determines the total cost of direct materials to be purchased.

Materials needed for production
+ Desired ending materials inventory
- Estimated beggining materials inventory
Direct materials to be purchased

In Colt Manufacturing, Inc. production operations leather and lining are required for the production of wallets and handbags. The quantity of direct materials expected to be used for each unit of product is as follows:

Wallets:                                                           Handbags:
Leather: 0.30 square yard per unit                     Leather: 1.25 square yards per unit
Lining: 0.10 square yard per unit                        Lining: 0.50 square yard per unit

Based on this data and the production budget, the direct materials purchases budget is prepared. As shown in the table below, for Colt Manufacturing, Inc., to produce 520,000 wallets, 156,000 square yards (520,000 units X 0.30 square yard per unit) of leather are needed. Likewise, to produce 292,000 handbags, 365,000 square yards (292,000 units X 1.25 square yards per unit) of leather are needed. We can calculate the needs for lining in a similar manner. Then adding the desired ending inventory for each material and deducting the estimated beggining inventory determines the amount of each material to be purchased. Multiplying these amounts by the estimated cost per square yard yields us the total materials purchase cost.

Colt Manufacturing, Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2008
	DIRECT MATERIALS
.	Leather	Lining	Total
Square Yards needed for production (*)
Wallets (Note A)	156,000	52,000
Handbags (Note B)	365,000	146,000
Plus desired inventory, December 31, 2008	20,000	12,000
Total	541,000	210,000
Less estimated inventory, January 1, 2008	18,000	15,000
Total square yards to be purchased	523,000	195,000
Unit price (per square yard)	X $4.50	X $1.20
Total Direct Materials Purchases	$2,353,500	$234,000	$2,587,500

* Square Yards needed for the production:
NOTE A: Leather: 520,000 units X 0.30 sq. yd. per unit = 156,000 sq. yds.
Lining: 520,000 units X 0.10 sq. yd. per unit = 52,000 sq. yds.

NOTE B: Leather: 292,000 units X 1.25 sq. yd. per unit = 365,000 sq. yds.
Lining: 292,000 units X 0.50 sq. yd. per unit = 146,000 sq. yds.