## Direct Materials Budget

### Learning Outcomes

• Prepare a direct materials budget

The direct materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production. This budget is prepared similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter. This is typically determined as a percent of next quarter’s material needs. In a materials budget, we will deal with units first and then add the budgeted cost near the end. We also need to know how much direct materials are needed for each unit.

The direct materials budget is dependent upon the sales budget and the production budget, reproduced here:

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GelSoft’s standard cost for raw materials is \$11 per kilogram (Kg). The standard quantity per seat is 0.68 Kg (about a pound and a half). Beginning raw materials inventory is projected to be 25,000 pounds but management wants to reduce that to the equivalent of one month’s production rounded to the nearest hundred Kg.

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## Ending Raw Materials Inventory

Ending raw materials inventory can be estimated in a number of ways, but let’s assume that GelSoft is using a rolling (continuous) budget and therefore is using a fairly sophisticated method of determining ending raw materials inventory sufficient to cover the first month of the next quarter’s production. In this case, if the company extended projected sales to Q1 and Q2 of the next budget year, they would come up with the following:

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Budgeted sales for the first quarter of the next budget cycle is Q4 estimated sales times 105%, and budgeted sales for the second quarter of the next budget cycle is the prior quarter’s estimated sales times 105%. One-third of 51,051 units is 17,017, which we will round to 17,000 for budgeting purposes. Our ending inventory from the budget we are creating is 16,200 (based on 48,620/3 rounded to the nearest hundred), so our production needs for the first quarter of the next budget cycle comes to 49,420 units. One-third of that amount (approximating one month’s production) is 16,473.33 units. Multiplying that amount by our standard raw materials usage of 0.68 Kg gives us a target ending raw materials inventory of 11,200 Kg (rounded to the nearest hundred).

GelSoft is creating these budgets on a quarterly basis but could create them monthly, semi-annually, or annually. Below is the production budget and the resultant raw materials budget for the year, broken down by quarter:

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Notice that purchases during Q1 are scheduled to be significantly lower than the following quarters as beginning inventory is used up before new materials are purchased, thus reducing the amount on hand and moving the company toward a more just-in-time inventory system.

Also, the ending raw materials inventory for each quarter is equal to the next quarter’s production divided by three multiplied by the DM need for each unit. For instance, ending RM inventory for Q1 (Jan-Feb-Mar) needs to be enough to cover April production of approximately 14,233 units (42,700/3) at 0.68 kg per unit, which is 9,678.44 kg, which for purposes of this budget we will round to 9,700 kg.

Here is a video review of how to prepare a direct materials budget: