lecture (10)

Dr. Mohiy Samy El-Shabasy, Associate Professor

The Master Budgets

(3) Direct Materials Budget:
The direct materials budget shows both the quantity and cost of direct
materials to be purchased. The quantities of direct materials are derived from
the following formula.
1. Direct Material required for production =
production units x Direct material per unit
2. Direct materials units to be purchased =
Material required for production + Ending Material inventory –
Beginning Material inventory.
3. Cost of direct materials purchases =
Direct materials purchases x Cost per unit of Material

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Example (1):
Bronco Company produces and sales product (Z), to produce this
product need two direct materials (A) and (B), and the following information
is available: Production units of product (Z) 10,000 Units.
(A) (B)
Direct material per unit 3 KG 5 KG
Direct material cost per KG $5 $4
Beginning Material inventory (KG) 4000 2000
Ending Material inventory (KG) 3000 5000

Required:
Prepare Direct Material Budget

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 Solution

Direct Material Budget

Direct Materials
(A) B
Production units 10,000 10,000
× Direct material per unit (Needs) 3 5
Direct Material required for production 30,000 50,000
+ Ending inventory 3,000 5,000
- Beginning inventory (4,000) (2,000)
Direct materials units to be purchased 29,000 53,000
× Cost per KG $5 $4
Cost of direct materials purchases $145,000 $212,000

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(4) Direct Labor Budget:
Like the direct materials budget, the direct labor budget contains the
hours and cost of direct labor necessary to meet production requirements. The
total direct labor cost is derived from the following formula.

Example (2):
Silver Bowl Company manufactures a single product, and the company
is preparing its budgets for the next year. The following information is
available:
Sales estimations:
Product (A)
Expected Sales units 100,000 units
Selling price per unit 300 $

The product has the following material and labor requirements:

Product (A) Costs information
Direct Material per unit 2 KG Direct material $ 8 per KG.
Labor hours per unit 4 hours Direct labor $ 6 per hour.

Inventory information:
Beginning inventory Ending inventory
Product (A) 20,000 units 30,000 units
Material 6,000 KG 12,000 KG

Required: Prepare the following Budgets: Sales Budget, Production

Budget, Direct material Budget, Direct labor budget.

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 Solution
(1) Sales Budget
Expected Sales 100,000 units
Selling Price $300
Expected Sales Revenue $30,000,000
(2) Production Budget
Expected Sales units 100,000 units
+ Ending Inventory 30,000
- Beg. Inventory (20,000)
Production Units 110,000 units
(3) Direct material Budget
Production units 110,000 units
× Needs From Material Per Unit 2 K. G
Direct Material required for production 220,000 K. G
+ Ending Inventory 12,000
- Beg. Inventory (6,000)
Direct materials units to be purchased 226,000 K. G
× Cost per K. G $8
Cost of Direct materials purchases $1,808,000

(4) Direct labor budget:

Production units 110,000 units
× Needs From Labor Per Unit 4 hours
labor hours required for production 440,000 hours
Cost of labor per unit 6
Total cost of labor $2,640,000