The Handy Accounting Answer Book by Amber K. Gray

Author:Amber K. Gray
Language: eng
Format: epub
Publisher: Visible Ink Press
Published: 2018-06-14T16:00:00+00:00

Just as with the production budget, notice that the total column for the quarter is unique. The desired ending inventory for the quarter is the same as the desired ending inventory for the last month of the quarter (March). The month of March ends on March 31. The first quarter also ends on March 31. Accordingly, when we are talking about the desired ending inventory for March and for the first quarter, we are referring to the extra cucumbers we want to have on March 31, which happens to be given in the example of 3,000 cucumbers.

Likewise, the beginning inventory for the quarter in total matches the beginning inventory for the first month of the quarter (January). The month of January begins on January 1. The first quarter also begins on January 1. Accordingly, when we are talking about the beginning inventory for January and for the first quarter, we are referring to the extra cucumbers we will have on January 1, which happens to be the 4,000 units on hand as of December 31.

What is the purpose of the schedule of expected cash disbursements for direct materials?

While the direct materials budget tells you the cost of direct materials purchased for each month, it does not tell you when you will actually pay the cash for those purchases. As such, in order to determine when the cash will be paid for direct materials, you must prepare a schedule of expected cash disbursements.

The schedule of expected cash disbursements for direct materials shows when cash is expected to be paid for direct materials purchases made during the budget period. Remember that most companies make sales on credit and send their customers invoices for the amounts owed. Depending on the payment terms, the cash may not be paid for one to three months (or more) following the date of the sale. Accordingly, if a company makes a purchase in January, it cannot assume it will pay all that cash in January. The schedule of cash disbursements takes the budgeted direct materials purchases and spreads it across the months it will be paid in using historical payment data. (Note that this process is identical to the schedule of cash collections.)

For example, assume that Spicy Pickle Company’s direct material purchases are paid for in the following pattern: 50% paid in the month the purchases are made, with the remaining 50% paid in the following month. Also assume that the accounts payable balance on December 31, 2019, of $3,000 is expected to be paid in full in January 2020.

Spicy Pickle Company would then take the budgeted cost of direct materials from each month in the direct materials budget and assume 50% would be paid that same month, and 50% would be paid the following month. For example, the January budgeted direct materials costs are $6,203. If it pays 50% of that in January, that would result in $3,101.50 paid in January and the remaining $3,101.50 being paid in February. When you add the $3,101.50 cash paid

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