Calculate Direct Material (DM) Purchase Budget

Use this equation to calculate the Direct Material (DM) Purchase Budget for a manufacturing company:

Amount of raw material required for production
+ Number of raw materials desired in ending inventory
= Total number of raw materials required
- Amount of raw materials in beginning inventory
= Amount of raw materials to purchase
x Cost Per Raw Material
= Direct Material (DM) (in dollars) to purchase this period

Extra Accounting Examples and Practice Problems:

Job Order Costing and Process Costing

Plant-wide Overhead Rate

What are Indirect Materials
Variable Cost Ratio Example

Activity Base Costing Differences
When to Use Process Costing

What is a Cost Driver?

Three Elements of Product Cost

What is an allocation base?

Manufacturing Overhead Variable Cost

Under applied and Over applied Overhead

Three Elements of Product Cost

Calculate Material Quantity Variance

What are Direct Materials?

Calculate Material Quantity Variance

How to Calculate Material Quantity Variance Example Problem

A beer manufacturer uses a standard costing system to assemble costs with the production of beer. The material standards of each bottle of beer produced are 0.8 liters at a standard cost of $2.35 per liter. During the month of August, the beer manufacturer purchased 75,000 liters of materials at a total cost of $171,000. It used 64,000 of these liters to produce 71,500 bottles of beer.

What is the beer manufacturer’s materials quantity variance for the month of August?

DM quantity variance = Standard DM Price * (DM Used in Production – DM allowed for output level)

= $2.35 (64,000 – 57,300)
= $15,745

71,500 bottles produced x 0.8 liters/bottle = 57,300 liters allowed

Is the variance favorable or unfavorable?

Unfavorable because more material was used than needed given our output

Explanation for the Unfavorable Variance

- inferior input was purchased from supplier
- unskilled workers wasted material during production
- inventory loss or inventory spoilage


Additional Accounting Information on Material Quantity Variances:
Calculating Accounting Variance Problem

Asset Turnover Ratio Equation

Asset Turnover Ratio is sales revenues divided by average total assets during a specified period of the sales.

It used the income statement account balance divided by the average balance of a balance sheet account.
Asset Turnover Ratio= Revenue/Total Assets

It determines the amount of sales that are generated from each dollar of assets that a company owns.
Additional Accounting Examples and Explanations:

Degree of Financial Leverage
How to Calculate Current and Quick Ratios
Calculate Invested Capital
Ratio Analysis and Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio

Expanded ROI formula

Using the Expanded Accounting Equation

During 2003, the total assets of a Tax Preparation Firm increased by $12,250, and total liabilities increased by $25,650. During the year, the company issued additional stock of $14,000, and paid cash dividends of $7,000. What was their net income for the year 2003?


Treat 'increase' as a POSITIVE and 'decrease' as a NEGATIVE value.

It is essential to use the expanded accounting equation to solve this problem.


12250 = 25650 + E
E = - 13400

Now use the expanded accounting equation, more specifically that of EQUITY to solve for
Net Income.

Equity = Stock Issued- Dividends + Net income
-13400 = 14000 - 7000 + Net Income

Solving for Net Income of Tax Preparation Firm :

-20400 or net loss of 20400

Additional Help:
Accounting Equation Example

What is an Intangible Asset?

An Intangible Asset is any Asset having no physical existence. Examples of Intangible Assets include patents and trademarks.

Intangible Assets can be depreciated. For example, a drug patent will follow a depreciation schedule. Economist consider patents and temporary monopoly allowed by the government on intellectual property.

Depreciation of an Asset and Book Value

A Small Business Loan Company purchased a truck at a cost of $56,000 on January 1, 2000. The truck is expected to have a useful life of 8 years, and a salvage value of $12,000. After the adjustments are recorded and posted to the accounting records on December 31, 2004, the book value of the truck is:


( 56000 - 12000 ) / 8 = 5500 per year

Jan 1, 2000 - Dec 31, 2004 ===> 5 years

The total auto depreciation cost for the truck for 5 years is 5500 x 5 = 27500
You then must subtract this value from the purchase price of the truck:


56000 - 27500 = 28500

Book Value of Truck: 28500

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

Asset Historical Cost Examples
Straight Link Depreciation Example
Depreciation of an Asset and Book Value

How to solve for lower of cost or market (LCM)?

A Golf Wholesale Company’s Merchandise Inventory was made up of the following items on December 31, 2007:

Items		Units	Cost per unit	Market Value per unit
Drivers	Tiger Woods	20	$30.00	$25.00
	John Daly	10	$50.00	$20.00
Irons	Phil Mickelson	40	$10.00	$15.00
	Vijay Singh	50	$40.00	$25.00

Assuming that the lower of cost or market (LCM) method is applied to individual items, the adjusting entry on December 31, 2007 will increase Cost of Goods Sold by for the Golf Wholesale Company:




First, figure out the Total Cost (multiply units x cost per unit) and the Total Market Value (multiply units x market value per unit) for each individual item on the list
Total Cost Total Market Value
Tiger Woods 600 500
John Daly 500 200
Phil Mickelson 400 600
Vijay Singh 2000 2250


Then total cost = $3500
Total MV (The value of the LCM so 500 + 200 + 400 + 2000) = 3100

Then just subtract $3500 - $3100 = $400

LCM for the Golf Wholesale Company is $400

This is the number that must appear on financial statements.

How to Calculate Net Income

The December 31, 2006 Balance Sheet of Business Card's Company shows Assets on the balance sheet of $35,000 and Liabilities of $23,000. During the year 2007, the company issued more stock for $3,500, and paid dividends of $800 to all shareholders. If the December 31, 2007 Balance Sheet shows Assets of $43,000, and Liabilities of $27,000, what must have been the Net Income for the year 2007?


Ending balance of each main account are given as follows (according to the accounting records in year 2006):

Asset = 35000
Liabilities = 23000

By using the accounting equation (A = L + E), we can find that Owner's Equity = 12000.

The ending balance for this company in 2007 shows:

Asset = 43000
Liabilities = 27000

By using the same method, Equity is calculated using the accounting equation A = L + E.
Equity = 16000

The question is to calculate Net Income.

Net income, dividends, stocks are all part of the owner's equity in the accounting equation.

OE beginning
+Net Income
+Common stock
-(Dividends)
= OE Ending

Calculate Net Income:

12000
+Net Income
+3500
-(800)
=16000

What is net income?

Answer:
Net income = 1300

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet

Common Size Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

Accounting Bank Reconciliation

Federal Tax Accounting Links

A Comprehensive List of Online Federal Tax Resources for Accountants

1. U.S. Tax Code On-line
2. U.S. Tax Court
3. Browse the Federal Tax Code
4. Social Security Administration
5. IRS Tax Forms and Publications
6. Justice Department - Tax Division
7. U.S. Treasury Department
8. Joint Committee on Taxation

These sites provide accurate information on taxation to accounting students and accountants.

Purpose of Budgets

Why is it essential that managers design budgets?

1. Budgets provide a method of communicating management’s plans throughout the organization to others.

2. Budgets force managers to plan for the future.

3. The budgeting process allocates resources to parts of the organization where they can be used most effectively.

4. The budgeting process can uncover potential problems before they occur.

5. Budgeting ensures that everyone in the organization is working in the same direction towards the same goals.

6. Budgets define goals and objectives that can serve as benchmarks for evaluating performance in future periods.

Additional Accounting Examples and Links:

Level of Sales Budgets

What is GAAP Definition?

Generally Accepted Accounting Principles (GAAP) - It is a set of rules and procedures that are considered accepted accounting practice by practicing accountants. These principles are created and determined by the Financial Accounting Standards Board (FASB)

More Information and Link about GAAP:

Sources of GAAP Accounting Principles

Financial Accounting Principles Board

Accounting Principles Board APB