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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.
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:
Based on this data and the production budget, the direct
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.
to produce 292,000 handbags,
365,000 square yards
(292,000 units X 1.25 square yards per unit) of leather
can calculate the needs for lining in a similar manner.
adding the desired ending inventory for each material and
estimated beggining inventory determines the amount of each material to
be purchased. Multiplying these amounts by the
per square yard yields us the total materials purchase cost.
Square Yards needed
for the production:
NOTE B: Leather:
292,000 units X 1.25 sq. yd. per unit = 365,000
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