{"id":183,"date":"2021-01-26T22:21:06","date_gmt":"2021-01-26T22:21:06","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=183"},"modified":"2021-06-11T05:41:41","modified_gmt":"2021-06-11T05:41:41","slug":"performance-report","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/performance-report\/","title":{"raw":"Direct Materials Budget","rendered":"Direct Materials Budget"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Prepare a direct materials budget<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"aligncenter wp-image-1433\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/07220554\/Screen-Shot-2021-05-07-at-3.05.34-PM-300x260.png\" alt=\"A flowchart titled \u201cTypes of Budgets\u201d. The materials budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&amp;A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&amp;A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&amp;A budget to the cash budget.\" width=\"500\" height=\"434\" \/>\r\nThe direct materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production. This budget is prepared similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter. This is typically determined as a percent of next quarter\u2019s material needs. In a materials budget, we will deal with units first and then add the budgeted cost near the end. We also need to know how much direct materials are needed for each unit.\r\n\r\nThe direct materials budget is dependent upon the sales budget and the production budget, reproduced here:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nSales Budget in Units<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Quarter<\/span><\/th>\r\n<th class=\"r\" scope=\"col\">Units (rounded)<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Q1<\/td>\r\n<td class=\"r\">40,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Q2<\/td>\r\n<td class=\"r\">42,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Q3<\/td>\r\n<td class=\"r\">44,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Q4<\/td>\r\n<td class=\"r\">46,305<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Projected Sales<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>172,405<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nProduction Budget in Units<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Budgeted\/Projected sales, in units<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 172,405<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Plus: ending inventory target<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 16,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total units needed to meet goals<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>188,605<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: units in beginning inventory<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 30,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Units needed to be produced to meet goals<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>158,605<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nGelSoft\u2019s standard cost for raw materials is $11 per kilogram (Kg). The standard quantity per seat is 0.68 Kg (about a pound and a half). Beginning raw materials inventory is projected to be 25,000 pounds but management wants to reduce that to the equivalent of one month\u2019s production rounded to the nearest hundred Kg.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nDirect Materials Budget in Units<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Budgeted units to be produced<\/td>\r\n<td class=\"r\">158,605<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct materials needed per unit (kilograms)<\/td>\r\n<td class=\"r\">0.680<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Kg direct materials needed<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>107,851<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Plus: desired DM in ending inventory (Kg) (see below)<\/td>\r\n<td class=\"r\">11,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: DM in beginning inventory (Kg)<\/td>\r\n<td class=\"r\">(25,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Budgeted purchase of direct materials<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>94,051<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Projected cost per Kg<\/td>\r\n<td class=\"r\">$11<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Budgeted cost of direct materials to be purchased<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,034,561<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<h2>Ending Raw Materials Inventory<\/h2>\r\nEnding raw materials inventory can be estimated in a number of ways, but let\u2019s assume that GelSoft is using a rolling (continuous) budget and therefore is using a fairly sophisticated method of determining ending raw materials inventory sufficient to cover the first month of the next quarter\u2019s production. In this case, if the company extended projected sales to Q1 and Q2 of the next budget year, they would come up with the following:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nProduction Budget in Units<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Q1 YR 2<\/th>\r\n<th class=\"r\" scope=\"col\">Q2 YR 2<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Budgeted\/Project sales, in units<\/td>\r\n<td class=\"r\">48,620<\/td>\r\n<td class=\"r\">51,051<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Plus: ending inventory target<\/td>\r\n<td class=\"r\">17,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total units needed to meet goals<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>65,620<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: units in beginning inventory<\/td>\r\n<td class=\"r\">16,200<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Units needed to be produced to meet goals<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>49,420<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nBudgeted sales for the first quarter of the next budget cycle is Q4 estimated sales times 105% and budgeted sales for the second quarter of the next budget cycle is the prior quarter\u2019s estimated sales times 105%. One-third of 51,051 units is 17,017 which we will round to 17,000 for budgeting purposes. Our ending inventory from the budget we are creating is 16,200 (based on 48,620\/3 rounded to the nearest hundred) so our production needs for the first quarter of the next budget cycle is 49,420 units. One-third of that amount (approximating one month\u2019s production) is 16,473.33 units. Multiplying that amount by our standard raw materials usage of 0.68 Kg gives us a target ending raw materials inventory of 11,200 Kg (rounded to the nearest hundred).\r\n\r\nGelSoft is creating these budgets on a quarterly basis, but could create them monthly, semi-annually, or annually. Below is the production budget and the resultant raw materials budget for the year, broken down by quarter:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nProduction Budget in Units<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\r\n<th class=\"r\" scope=\"col\">Q1<\/th>\r\n<th class=\"r\" scope=\"col\">Q2<\/th>\r\n<th class=\"r\" scope=\"col\">Q3<\/th>\r\n<th class=\"r\" scope=\"col\">Q4<\/th>\r\n<th class=\"r\" scope=\"col\">Year<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Budgeted\/Project sales, in units<\/td>\r\n<td class=\"r\">40,000<\/td>\r\n<td class=\"r\">42,000<\/td>\r\n<td class=\"r\">44,100<\/td>\r\n<td class=\"r\">46,305<\/td>\r\n<td class=\"r\">\u00a0 172,405<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Plus: ending inventory target<\/td>\r\n<td class=\"r\">14,000<\/td>\r\n<td class=\"r\">14,700<\/td>\r\n<td class=\"r\">15,400<\/td>\r\n<td class=\"r highlight\">16,200<\/td>\r\n<td class=\"r highlight\">16,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total units needed to meet goals<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>54,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>56,700<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>59,500<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62,505<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>188,605<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: units in beginning inventory<\/td>\r\n<td class=\"r highlight-green\">30,000<\/td>\r\n<td class=\"r\">14,000<\/td>\r\n<td class=\"r\">14,700<\/td>\r\n<td class=\"r\">15,400<\/td>\r\n<td class=\"r highlight-green\">30,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Units needed to be produced to meet goals<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>24,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>42,700<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>44,800<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>47,105<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>158,605<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>GelSoft\r\nDirect Materials Budget<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\r\n<th class=\"r\" scope=\"col\">Q1<\/th>\r\n<th class=\"r\" scope=\"col\">Q2<\/th>\r\n<th class=\"r\" scope=\"col\">Q3<\/th>\r\n<th class=\"r\" scope=\"col\">Q4<\/th>\r\n<th class=\"r\" scope=\"col\">Year<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Budgeted units to be produced<\/td>\r\n<td class=\"r\">24,000<\/td>\r\n<td class=\"r\">42,700<\/td>\r\n<td class=\"r\">44,800<\/td>\r\n<td class=\"r\">47,105<\/td>\r\n<td class=\"r\">158,605<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct materials needed per unit (Kg)<\/td>\r\n<td class=\"r\">0.680<\/td>\r\n<td class=\"r\">0.680<\/td>\r\n<td class=\"r\">0.680<\/td>\r\n<td class=\"r\">0.680<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Kg direct materials needed<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>16,320<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>29,036<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>30,464<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>32,031<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>107,851<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Plus: desired DM in ending inventory (Kg)<\/td>\r\n<td class=\"r\">9,700<\/td>\r\n<td class=\"r\">10,200<\/td>\r\n<td class=\"r\">10,700<\/td>\r\n<td class=\"r\">11,200<\/td>\r\n<td class=\"r\">11,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: DM in beginning inventory (Kg)<\/td>\r\n<td class=\"r\">(25,000)<\/td>\r\n<td class=\"r\">(9,700)<\/td>\r\n<td class=\"r\">(10,200)<\/td>\r\n<td class=\"r\">(10,700)<\/td>\r\n<td class=\"r\">(25,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Budgeted purchase of direct materials<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>1,020<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>29,536<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>30,964<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>32,531<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>94,051<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Projected cost per Kg<\/td>\r\n<td class=\"r\">$11<\/td>\r\n<td class=\"r\">$11<\/td>\r\n<td class=\"r\">$11<\/td>\r\n<td class=\"r\">$11<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Budgeted cost of direct materials to be purchased<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$11,220<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$324,896<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$340,604<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$357,841<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,034,561<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nNotice that purchases during Q1 are scheduled to be significantly lower than the following quarters as beginning inventory is used up before new materials are purchased, thus reducing the amount on hand and moving the company toward a more Just-in-time inventory system.\r\n\r\nAlso, the ending raw materials inventory for each quarter is equal to the next quarter\u2019s production divided by three multiplied by the DM need for each unit. For instance, ending RM inventory for Q1 (Jan-Feb-Mar) needs to be enough to cover April production of approximately 14,233 units (42,700\/3) at 0.68 kg per unit, which is 9,678.44 kg which for purposes of this budget we will round to 9,700 kg.\r\n\r\nHere is a video review of how to prepare a direct materials budget:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352578&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=jgN_E4qlkI4&amp;video_target=tpm-plugin-ygfetgvc-jgN_E4qlkI4\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/DirectMaterialsBudgetPart1_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Direct Materials Budget, Part 1\" here (opens in new window)<\/a>.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220594[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Prepare a direct materials budget<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1433\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/07220554\/Screen-Shot-2021-05-07-at-3.05.34-PM-300x260.png\" alt=\"A flowchart titled \u201cTypes of Budgets\u201d. The materials budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&amp;A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&amp;A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&amp;A budget to the cash budget.\" width=\"500\" height=\"434\" \/><br \/>\nThe direct materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production. This budget is prepared similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter. This is typically determined as a percent of next quarter\u2019s material needs. In a materials budget, we will deal with units first and then add the budgeted cost near the end. We also need to know how much direct materials are needed for each unit.<\/p>\n<p>The direct materials budget is dependent upon the sales budget and the production budget, reproduced here:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nSales Budget in Units<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Quarter<\/span><\/th>\n<th class=\"r\" scope=\"col\">Units (rounded)<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Q1<\/td>\n<td class=\"r\">40,000<\/td>\n<\/tr>\n<tr>\n<td>Q2<\/td>\n<td class=\"r\">42,000<\/td>\n<\/tr>\n<tr>\n<td>Q3<\/td>\n<td class=\"r\">44,100<\/td>\n<\/tr>\n<tr>\n<td>Q4<\/td>\n<td class=\"r\">46,305<\/td>\n<\/tr>\n<tr>\n<td>Total Projected Sales<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>172,405<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nProduction Budget in Units<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Budgeted\/Projected sales, in units<\/td>\n<td class=\"r\">\u00a0 \u00a0 172,405<\/td>\n<\/tr>\n<tr>\n<td>Plus: ending inventory target<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 16,200<\/td>\n<\/tr>\n<tr>\n<td>Total units needed to meet goals<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>188,605<\/td>\n<\/tr>\n<tr>\n<td>Less: units in beginning inventory<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 30,000<\/td>\n<\/tr>\n<tr>\n<td>Units needed to be produced to meet goals<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>158,605<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>GelSoft\u2019s standard cost for raw materials is $11 per kilogram (Kg). The standard quantity per seat is 0.68 Kg (about a pound and a half). Beginning raw materials inventory is projected to be 25,000 pounds but management wants to reduce that to the equivalent of one month\u2019s production rounded to the nearest hundred Kg.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nDirect Materials Budget in Units<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Budgeted units to be produced<\/td>\n<td class=\"r\">158,605<\/td>\n<\/tr>\n<tr>\n<td>Direct materials needed per unit (kilograms)<\/td>\n<td class=\"r\">0.680<\/td>\n<\/tr>\n<tr>\n<td>Total Kg direct materials needed<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>107,851<\/td>\n<\/tr>\n<tr>\n<td>Plus: desired DM in ending inventory (Kg) (see below)<\/td>\n<td class=\"r\">11,200<\/td>\n<\/tr>\n<tr>\n<td>Less: DM in beginning inventory (Kg)<\/td>\n<td class=\"r\">(25,000)<\/td>\n<\/tr>\n<tr>\n<td>Budgeted purchase of direct materials<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>94,051<\/td>\n<\/tr>\n<tr>\n<td>Projected cost per Kg<\/td>\n<td class=\"r\">$11<\/td>\n<\/tr>\n<tr>\n<td>Budgeted cost of direct materials to be purchased<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,034,561<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<h2>Ending Raw Materials Inventory<\/h2>\n<p>Ending raw materials inventory can be estimated in a number of ways, but let\u2019s assume that GelSoft is using a rolling (continuous) budget and therefore is using a fairly sophisticated method of determining ending raw materials inventory sufficient to cover the first month of the next quarter\u2019s production. In this case, if the company extended projected sales to Q1 and Q2 of the next budget year, they would come up with the following:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nProduction Budget in Units<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Q1 YR 2<\/th>\n<th class=\"r\" scope=\"col\">Q2 YR 2<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Budgeted\/Project sales, in units<\/td>\n<td class=\"r\">48,620<\/td>\n<td class=\"r\">51,051<\/td>\n<\/tr>\n<tr>\n<td>Plus: ending inventory target<\/td>\n<td class=\"r\">17,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total units needed to meet goals<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>65,620<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Less: units in beginning inventory<\/td>\n<td class=\"r\">16,200<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Units needed to be produced to meet goals<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>49,420<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Budgeted sales for the first quarter of the next budget cycle is Q4 estimated sales times 105% and budgeted sales for the second quarter of the next budget cycle is the prior quarter\u2019s estimated sales times 105%. One-third of 51,051 units is 17,017 which we will round to 17,000 for budgeting purposes. Our ending inventory from the budget we are creating is 16,200 (based on 48,620\/3 rounded to the nearest hundred) so our production needs for the first quarter of the next budget cycle is 49,420 units. One-third of that amount (approximating one month\u2019s production) is 16,473.33 units. Multiplying that amount by our standard raw materials usage of 0.68 Kg gives us a target ending raw materials inventory of 11,200 Kg (rounded to the nearest hundred).<\/p>\n<p>GelSoft is creating these budgets on a quarterly basis, but could create them monthly, semi-annually, or annually. Below is the production budget and the resultant raw materials budget for the year, broken down by quarter:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nProduction Budget in Units<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\n<th class=\"r\" scope=\"col\">Q1<\/th>\n<th class=\"r\" scope=\"col\">Q2<\/th>\n<th class=\"r\" scope=\"col\">Q3<\/th>\n<th class=\"r\" scope=\"col\">Q4<\/th>\n<th class=\"r\" scope=\"col\">Year<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Budgeted\/Project sales, in units<\/td>\n<td class=\"r\">40,000<\/td>\n<td class=\"r\">42,000<\/td>\n<td class=\"r\">44,100<\/td>\n<td class=\"r\">46,305<\/td>\n<td class=\"r\">\u00a0 172,405<\/td>\n<\/tr>\n<tr>\n<td>Plus: ending inventory target<\/td>\n<td class=\"r\">14,000<\/td>\n<td class=\"r\">14,700<\/td>\n<td class=\"r\">15,400<\/td>\n<td class=\"r highlight\">16,200<\/td>\n<td class=\"r highlight\">16,200<\/td>\n<\/tr>\n<tr>\n<td>Total units needed to meet goals<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>54,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>56,700<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>59,500<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62,505<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>188,605<\/td>\n<\/tr>\n<tr>\n<td>Less: units in beginning inventory<\/td>\n<td class=\"r highlight-green\">30,000<\/td>\n<td class=\"r\">14,000<\/td>\n<td class=\"r\">14,700<\/td>\n<td class=\"r\">15,400<\/td>\n<td class=\"r highlight-green\">30,000<\/td>\n<\/tr>\n<tr>\n<td>Units needed to be produced to meet goals<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>24,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>42,700<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>44,800<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>47,105<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>158,605<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>GelSoft<br \/>\nDirect Materials Budget<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Description<\/span><\/th>\n<th class=\"r\" scope=\"col\">Q1<\/th>\n<th class=\"r\" scope=\"col\">Q2<\/th>\n<th class=\"r\" scope=\"col\">Q3<\/th>\n<th class=\"r\" scope=\"col\">Q4<\/th>\n<th class=\"r\" scope=\"col\">Year<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Budgeted units to be produced<\/td>\n<td class=\"r\">24,000<\/td>\n<td class=\"r\">42,700<\/td>\n<td class=\"r\">44,800<\/td>\n<td class=\"r\">47,105<\/td>\n<td class=\"r\">158,605<\/td>\n<\/tr>\n<tr>\n<td>Direct materials needed per unit (Kg)<\/td>\n<td class=\"r\">0.680<\/td>\n<td class=\"r\">0.680<\/td>\n<td class=\"r\">0.680<\/td>\n<td class=\"r\">0.680<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Kg direct materials needed<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>16,320<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>29,036<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>30,464<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>32,031<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>107,851<\/td>\n<\/tr>\n<tr>\n<td>Plus: desired DM in ending inventory (Kg)<\/td>\n<td class=\"r\">9,700<\/td>\n<td class=\"r\">10,200<\/td>\n<td class=\"r\">10,700<\/td>\n<td class=\"r\">11,200<\/td>\n<td class=\"r\">11,200<\/td>\n<\/tr>\n<tr>\n<td>Less: DM in beginning inventory (Kg)<\/td>\n<td class=\"r\">(25,000)<\/td>\n<td class=\"r\">(9,700)<\/td>\n<td class=\"r\">(10,200)<\/td>\n<td class=\"r\">(10,700)<\/td>\n<td class=\"r\">(25,000)<\/td>\n<\/tr>\n<tr>\n<td>Budgeted purchase of direct materials<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>1,020<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>29,536<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>30,964<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>32,531<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>94,051<\/td>\n<\/tr>\n<tr>\n<td>Projected cost per Kg<\/td>\n<td class=\"r\">$11<\/td>\n<td class=\"r\">$11<\/td>\n<td class=\"r\">$11<\/td>\n<td class=\"r\">$11<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Budgeted cost of direct materials to be purchased<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$11,220<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$324,896<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$340,604<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$357,841<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,034,561<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Notice that purchases during Q1 are scheduled to be significantly lower than the following quarters as beginning inventory is used up before new materials are purchased, thus reducing the amount on hand and moving the company toward a more Just-in-time inventory system.<\/p>\n<p>Also, the ending raw materials inventory for each quarter is equal to the next quarter\u2019s production divided by three multiplied by the DM need for each unit. For instance, ending RM inventory for Q1 (Jan-Feb-Mar) needs to be enough to cover April production of approximately 14,233 units (42,700\/3) at 0.68 kg per unit, which is 9,678.44 kg which for purposes of this budget we will round to 9,700 kg.<\/p>\n<p>Here is a video review of how to prepare a direct materials budget:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352578&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=jgN_E4qlkI4&amp;video_target=tpm-plugin-ygfetgvc-jgN_E4qlkI4\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/DirectMaterialsBudgetPart1_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Direct Materials Budget, Part 1&#8221; here (opens in new window)<\/a>.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220594\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220594&theme=oea&iframe_resize_id=ohm220594\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-183\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Direct Materials Budget. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgia State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Direct Materials Budget, Part 1. <strong>Authored by<\/strong>: Kristin Ingram. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/jgN_E4qlkI4\">https:\/\/youtu.be\/jgN_E4qlkI4<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Direct Materials Budget\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Direct Materials Budget, Part 1\",\"author\":\"Kristin Ingram\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/jgN_E4qlkI4\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-183","chapter","type-chapter","status-publish","hentry"],"part":33,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/183","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":12,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/183\/revisions"}],"predecessor-version":[{"id":2190,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/183\/revisions\/2190"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/33"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/183\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=183"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=183"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=183"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=183"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}