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Material Budgeting | Direct Materials Budget

Direct Materials Budget Definition

The direct materials budget calculates the materials that must be purchased, by time period, in order to fulfill the requirements of the production budget, and is typically presented in either a monthly or quarterly format. The basic calculation used by the direct materials budget is:

+ Raw materials required for production
+ Planned ending inventory balance
= Total raw materials required

- Beginning raw materials inventory
= Raw materials to be purchased

It is impossible to calculate the direct materials budget for every component in inventory, since the calculation would be massive. Instead, it is customary to either calculate the approximate amount of inventory required, expressed as a grand total for the entire inventory, or else at a somewhat more detailed level by commodity type. It is possible to create a reasonably accurate direct materials budget by either means, if you have a material requirements planning software package that has a planning module. By entering the production budget into the planning module, the software can generate the expected direct materials budget for future periods. Otherwise, you will have to calculate the budget manually.

Example of the Direct Materials Budget

ABC Company plans to produce a variety of plastic goods, and 98 percent of its raw materials involve plastic resin. Thus, there is only one key commodity to be concerned with. Its production needs are outlined as follows:

ABC Company
Direct Materials Budget
For the Year Ended December 31, 20XX

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Product A (units)	5,000	6,000	7,000	8,000
x Resin/unit (lbs)	2	2	2	2
Total resin needed (lbs)	10,000	12,000	14,000	16,000
+ Planned ending inventory	2,000	2,400	2,800	3,200
= Total resin required	12,000	14,400	16,800	19,200

- Beginning inventory	1,600	2,000	2,400	2,800
= Resin to be purchased	10,400	12,400	14,400	16,400

Resin cost per pound	$0.50	$0.50	$0.55	$0.55
Total resin cost to purchase	$5,200	$6,200	$7,920	$9,020

The planned ending inventory at the end of each quarter is planned to be 20 percent of the amount of resin used during that month, so the ending inventory varies over time, gradually increasing as production requirements increase. The reason for the planned increase is that ABC has some difficulty receiving resin in a timely manner from its supplier, so it maintains a safety stock of inventory on hand.

The purchasing department expects that global demand will drive up the price of resin, so it incorporates a slight price increase into the third quarter, which carries forward into the fourth quarter.

Other Direct Materials Budget Issues

It is not customary to include a cash requirements calculation as part of the direct materials budget. Instead, the cash requirements are calculated for all of the revenues and expenditures of a business as a whole, and are then summarized on a separate page of the budget.