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INVENTORY AND PURCHASES BUDGET represents what a business plans to buy and how much inventory it intends to hold over a given timeframe, is based on three factors: a business' desired ending inventory, cost of goods sold, and beginning inventory. A business's desired ending inventory will drive that business' budgeted purchases over a given period of time. A larger desired ending inventory will typically lead to a larger Purchases Budget and vice-versa. While the Purchases Budget, a component of the Inventory and Purchases Budget, represents an estimate of future purchases, this is an accrual-based accounting figure, and it is the Disbursements for Purchases Budget (another component of the Inventory and Purchases Budget) that drives a company's cash flows.

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NATURAL CLASSIFICATION of costs focuses on the nature of the cost item. In this classification structure, the total operating costs of an activity can be classified into manufacturing costs and commercial costs. Manufacturing costs include all direct materials and direct labor, as well as, factory overhead. Such factory overhead costs include indirect materials (such as factory supplies & lubricants), indirect labor (such as supervision and inspection) and other indirect costs (such as rent, insurance, and utilities). Commercial expenses include marketing expenses (such as advertising, printing, and sales salaries) and administrative (general and administrative (G&A)) expenses (such as administrative office salaries, rent, and legal expenses).

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