 The direct materials budget is based on data from the production budget. We need to know how many units we're going to produce before we know how much direct material will be needed. You can see that the direct material budget is the third budget completed in the master budget process. In the simplest format, direct materials needed would be units to produce times direct materials used per unit. But a more common format would be to factor beginning and ending inventory into the calculation. So direct material needed is units to be produced times direct materials used per unit plus desired ending inventory of direct materials minus beginning inventory of direct materials. Let's assume that 20% of next quarter's direct material needs need to be on hand at the end of the quarter. So the desired ending inventory is 20% of next quarter's direct material needs for production and is added to the current quarter's direct material needed for production to arrive at total pounds of direct materials needed. Of course, ending inventory from one quarter becomes the beginning inventory in the next quarter. We subtract that from the total pounds of direct materials needed to arrive at direct materials pounds to be purchased. Finally, we multiply the cost of direct materials per pound by the number of pounds to arrive at the total cost of direct materials. So let's look at how we would do this in Excel. Notice the column letters and row numbers we will reference those when we build this budget in Excel. Here we have the production budget and the direct materials budget. We start by linking the two budgets together by having the units produced in direct materials, the direct materials budget linked to the same cells in the production budget. Then the desired ending inventory can be a formula based on the next quarter's pounds of direct materials needed for production. Beginning inventory can be a cell linked to the prior month's ending inventory. Total pounds of direct materials to be purchased and total cost of direct materials can both be formulas as I've shown here. Finally, some of the numbers are just assumed because I want to keep the examples straightforward.