Direct Materials Budget

When the company prepares the production budget for its fiscal period, each finished product must have what is called (BOM) or a bill of materials, any finished product is a group of basic materials and sub-raw materials and each material has a relative weight in the composition of the product, meaning we have a product XXX involves in its manufacture a group of raw materials.

Material A, which is 45% of the unit of the product, and Material B is 25%, and Material C is 30% and so on until the total weight of the raw materials is equal to 100%.

Of course, there are finished products whose unit of measurement in tons, for example, and therefore the basic materials and sub-raw materials in kilograms, for example in the heavy industry

If the finished product in the kilogram, for example, so the basic materials are in the gram, and so on, it's important to know the unit of measurement for the finished product and the basic materials and sub-raw materials, if any

Objectives of the Direct Materials Budget 

1- It estimates the amount of raw materials needed for the company so that the company can provide them, and this helps the production departments to have the necessary quantities for production and the necessary specifications to help them implement Production Planning at the scheduled dates.

2- It estimates the amount of inventory that must be held in each of the raw materials at the end of the budget period monthly, quarterly, semi-annually or annually according to the situation and estimates the amount of inventory that must be available at the beginning of the period and prevents the inventory accumulation.

3- Providing the procurement department with adequate data through which it can prepare the direct material purchases budget in the sense that the purchases budget is associated with the direct materials budget.

The role of the production department in preparing the direct materials budget 

The production department is responsible for determining the raw materials that each finished product needs, the types of raw materials required, and the auxiliary materials, and a bill of materials is created for each product of the finished products that include the raw materials used in it, the standard quantity of each material and the wastage percentage

The production department is responsible for determining the standard rate for each quantity of raw materials used, as well as the loss and damage rate that is determined according to various reasons such as the nature of the raw materials, the skill level of workers and the conditions of production and consumption to the production equipment and its effect on the quantity of production and on the basis of information  a bill of materials is created for each product and the amount of raw materials used and other materials auxiliary 

The standard rate used in the standard costing system must be a mix between the industrial rate in the company and the industry average to maintain a certain level of costs

Preparing the Direct Materials Budget 

The budget is prepared for each product separately, according to the period and the different materials for each product, so that the budget shows the planned quantity of raw materials for each product and in each period

It is classified according to products and raw materials distributed over four periods that are comprised of them the budget, and there are monthly sub-budgets associated with the budget of the quarter

For example, in the first quarter, the company targets to produce 100 tons, and this figure is from the production budget in the same period

We select the needs of each ton of steel of each raw material i.e. one ton of steel what is needed from each raw material (1000 * raw material percentage)

This figure (1000) means 1000 kg equals 1 ton

Generally

Direct Material in Units Needed for Production 

= Budgeted Production during the Period (production budget) * Units of Direct Material Required per Unit 

For example, a ton of steel consists of materials

A and its percentage in the composition of the product is 45% so one ton of this material requires 450 kg

B and its percentage in the composition of the product is 35% so one ton of this material requires 350 kg 

C and its percentage in the composition of the product is 30% so one ton of this material requires 300 kg 

To produce 100 tons

Material A needs = 100 * 450 = 45,000 kg

Material B needs = 100 * 350 = 35000kg

Material C needs = 100 * 300 = 30,000 kg

And so on in any product and in any unit of measurement for the finished product and units of measurement of raw materials

And then, the spoilage rate to each material is calculated, and this spoilage is very normal in any industry depending on the type of material or the industry itself or the efficiency of the workers

It is considered as an important part of production requirements by taking into consideration what determines the company's needs of the raw materials

The spoilage rate is estimated by the production department; the amount of spoilage in each material is calculated and added to the product raw material requirements

The third step

Calculating Inventory Carrying Cost (%)

For the company to produce in the quarter or period, the raw materials inventory must be available to purchase and supply from the suppliers, and therefore it must holding inventory in the warehouse and the inventory carrying cost varies from one raw material to another according to its nature

For example, the company may be of 20%, meaning that the company at the end of each quarter or monthly, it must have a raw material balance of 20% of the production needs of the second quarter

Assuming the second quarter, the company will produce 200 tons, and we will select these 200 tons what need of raw materials as much as we explained, and it must be that at the end of the first quarter the company inventory carrying cost equal 20% of the production needs of the second quarter

 So, to calculate the direct material in units that is needed for production

= Budgeted Beginning Direct Material in Units

+ Direct Material in Units Needed for Production

+ Normal Spoilage

− Budgeted Ending Direct Material in Units (a percentage of product raw material requirements for the next period)