Now we proceed with the preparation of supporting schedules for our operating budget.

In this episode, we will study direct materials usage and purchases.

So this is our goal.

Now, we start with direct material usage.

So, I created this table for you.

So we here, have materials one and two,

and a total that goes for dollar amounts.

And how do we proceed here?

So, direct materials are used to produce R and HD,

two kinds of spare parts.

So we start with direct materials used in the production of R.

So first of all from the previous schedule, from a previous episode,

we know that we have to produce 7,000 pieces of R.

And for each piece we know that we use 11 kilograms of material one,

and 5 kilograms of material two.

So, that results in these numbers 77 tons of material one and 35 tons of material two.

Now by the same token when we take the production of HD,

we remember that the amount will be 1,200 and

that uses 12 kilos of the first material and eight of the second one.

And the resulting numbers are 14,400

kilograms of material one and 9,600 of material two. We add this up.

And these numbers, 91,400 and 44,600,

these are the amount in kilograms of these materials that we will use in production.

Now where will we take these materials from?

From two sources, the first source is

the beginning inventory and the second source is purchases.

So beginning with inventory.

Why is it beginning? Because we use FIFO.

So we first take everything from the beginning inventory and then

what is lacking, we purchase.

So we take this number, subtract this number.

So we have to

overall purchase 83,400 kilograms of material one.

Before we arrive at this line here,

just, we make a first contribution in terms of dollars.

So if we take eight tons of material one from the beginning inventory,

its cost is 8,000 times $8 per kilo which is $64,000.

Here we have the same for material two and the total amount as $124,000.

Now, we said that we have to purchase 83,400

kilos of material one and 38,600 kilos of material two,

that is what we lack for production needs.

And here, we also multiply by unit costs.

And here, like I said,

we made the simplifying assumptions up there,

that the unit cost stays constant over the forecast period.

So for example, if we would like to take into account the changing costs of purchases,

we will change these numbers,

that is done in a straightforward way.

But here, we ignore that just not to make these calculations way too cumbersome.

Although, again, I am emphasizing it's pretty straightforward.

There are other things in these calculations that are

not so straightforward and you change some numbers,

but these are not so.

Again, we multiply this by that and the pre last line gives

you the cost of purchases $667,200, $386,000 and $1,053,200.

And in blue here,

there are a total costs of direct material used $73,200,

$446,000 and then $1,177,200.

So, that was the schedule for direct material usage.

But we have to remember,

that we used that in production but maybe,

if the ending balance of direct materials in inventory changes,

then we have to purchase more.

And the next schedule,

that is schedule 3B,

purchase of direct materials,

that shows how logic proceeds here.

Again, we have materials one, two, and total.

Now direct materials for use in production,

we take from the previous schedule, that's 91,400.

Now to that we have to add the target and direct materials inventory,

which is 9,000 kilos,

and the total is 100,400.

But then, we subtract

the beginning inventory of direct materials that we used in the previous schedule.

And then, we see that we have to purchase 92,400.

So in the previous schedule, we said that we have to put this in production,

but part of that arrives from our beginning of inventory.

Great. And that was 83,400.

But on top of that we have to purchase this to make

sure that we have the ending inventory of direct materials.

So exactly the same logic goes here,

and we arrive at the final numbers of purchases 92,400, 41,600.

Again, unit costs stay the same.

And therefore, we arrive at the final blue line that says

that total direct material purchase cost is $739,200,

$416,000, and then $1,155,200.

Now, you can say, well,

that sounds kind of redundant.

So it's almost close to what we did before.

But the story is remember,

this concept of numbers versus people.

Now in purchases we have the people who are in charge of purchases,

in production there are other people who are in charge of production.

So to properly provide these people with information,

we have to give this table to the purchasing people,

and the previous table to the production people.

So although they are close,

and when we put them together in these calculations they seem to be very,

almost doubling our efforts.

But their recipients are different people and that's very important.

Well, so far so good.

In what follows we proceed with other supporting schedules.