The direct materials budget

WORKING SESSION

THE ALPHA COMPANY

The Alfa company is a medium-sized company that is involved in the production of a single product, We are going to follow the company through the different stages of its budgetary cycle.

All data in money terms are in thousand UAH.

THE SALES BUDGET

As a result of the approved sales forecast, the company's sales in units for the year 2010 are expected to be 3,200. The company has set the unit sales price at 80,000 UAH.

On the basis of this information we can build up the sales budget

SCHEDULE 1

ALFA Company - 2010 Sales budget

	Quarter
					TOTAL
Expected sales in units					3,200
Unit sales (price UAH)
Total sales (UAH)	64,000	56,000	72,000	64,000	256,000

In order to build up the schedule of expected cash collections, we now assume that 70 percent of each quarter sales is collected in the quarter of sale, that 28% is collected in the following quarter, and that 2% is uncollectible.

SCHEDULE 1

ALFA Company - 2010 Expected cash collections

	Quarter
					TOTAL
Accounts receivable as of Dec.31, 2009	9,500				9,500
1st quarter sales	44,800	17,920			62,720
2d quarter sales		39,200	15,680		54,880
3d quarter sales			50,400	20,160	70,560
4th quarter sales				44,800	44,800
Total cash collections	54,300	57,120	66,080	64,960	242,460

THE PRODUCTION BUDGET

The staring point of the production budget is the number of units expected to be sold (see Schedule 1).

N.B. The number of units expected to be manufactured to meet the budgeted sales and inventory is calculated by subtracting the estimated inventory at the beginning of the period from the sum of units to be sold plus desired ending inventory.

Assume that the ending inventory in each quarter is 10 % of next quarter's sales and that ending inventory for the fourth quarter is 100 units.

SCHEDULE 2 ALFA Company - 2010 Production budget

	Quarter
					TOTAL
Planned sales Desired ending inventory	800 70	700 90	900 80	800 100	3,200 100
Total needs less beginning inventory	870 80	790 70	980 90	900 80	3,300 80
Units to be produced					3,220

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
					TOTAL
Units to be produced material needs per unit (kg)	x3	x3	x3	x3	3,220 x3
Total needs Desired ending inventory of materials	2,370	2,160	2,670	2,460	9,660
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

ALF A Company - Schedule of expected cash disbursements

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