The purchases budget for a merchandising firm replaces four budgets for a manufacturing firm. These four budgets are:

Question

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The purchases budget for a merchandising firm takes into account the expected sales and the desired ending inventory levels to determine the amount of inventory that needs to be purchased. This replaces the production budget, which is used by a manufacturing firm to determine how much of a product needs to be produced based on expected sales and inventory levels. The purchases budget also includes the direct materials budget and the direct labor budget, since these costs are still incurred by a merchandising firm. However, the manufacturing overhead budget is not needed since there is no manufacturing taking place in a merchandising firm.

The Purchases Budget for a Merchandising Firm Replaces Four Budgets