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       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.


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