Direct Material Purchases Budget & Direct Labor Budget

The direct material purchases budget of the important budgets because it determines the value of the raw materials to be purchased to cover the production quantity required and also covers the amount of inventory that must be held at the end of the period

This budget may be monthly, quarterly or semi-annually depending on the nature of the purchases of raw materials because there are materials that can be stored and there are hard-to-store materials for many reasons such as damage or explosion and there are raw materials whose prices rise and fall continuously based on the supply and demand, there are seasonal raw materials, there are raw materials at fixed prices in most cases, there are quickly importing raw materials and there are materials that take long-term approvals and procedures.

Raw materials pricing for required procurement are determined by the procurement department and in the light of the examination and analysis of the purchase prices in the previous periods and the future changes in those prices, the purchase price includes all expenses to the company to be incurred to receive the raw materials, both domestic and imported into the company's warehouses.

Objectives of Direct Material Purchases Budget

The company can set the purchase schedule of planned supply of materials, which helps it contract the quantities required for the materials at the best prices and specifications for each of them and on the planned dates so that it will avoid losses resulting from the company's need to buy them at high prices and therefore incur high costs, as well as there, are materials rely on few suppliers and must include into purchase contracts to cover the quantities and therefore the company must purchase the quantities and store them and therefore can afford high storage costs.

2- Providing the company’s management with all the necessary data for the company to be able to determine the production costs and then pricing the selling prices of their products.

3- The ability to determine the company's cash needs based on the company's purchases budget and thus determine the necessary payments at appropriate times.

Purchases Budget and Purchase Prices

Setting the purchase prices is one of the responsibilities of the procurement department because it has experience in setting the purchase prices and the pricing varies according to the nature of the purchase and is also linked to the quality of the products to prevent the presence of large spoilage rates that expose the company to many losses

Also, the purchase prices included in its setting the sources of purchasing that the company must rely on it because it was committed to the contracting terms and delivery the requirements quantities required at the specific time and location and also will it be the purchase be in small quantities as much as production each period i.e. a Just in Time (JIT)

As for the bulk purchasing, and in this case, there will be a discount and or a lower purchase price, and there are many factors involved in setting the prices of the raw materials included in the budget, and this is done through

Reviewing Purchasing Records in the Previous Years

Examining the prevailing price level in the products markets

Analyzing the price trends and identifying the potential expectations in light of economic changes and the rise or fall in raw material prices so that you can buy the right quantity at the right time at the right price.

When preparing the purchases budget, it must know the credit/ cash suppliers, and the volume of purchase from each supplier and whether it is cash or credit, and if it is credit, the credit period granted by suppliers, it must be from the credit period that the company gives to its customers because it follows also preparing the payments budget and the cash budget as well

One of the important factors involved in setting the purchase prices is the cost of transport and the storage cost if the company rents warehouses, and also in the case of the purchases from abroad, the insurance expenses, maritime transport, tariff, and customs clearance charges, and these expenses are a very important related to the purchases budget.

- It is estimated based on the prices that preceded this, taking into account the increases that occur to these fees, whether the increase in the cost of transport, tariff, and customs clearance charges.

An analysis is made for the cost of each raw material imported from abroad, starting from its purchase price to the invoice + insurance and maritime transport + tariff + internal transport so that the purchase price that is included in the purchases budget can be selected, taking into account the changes and adjustments that occur annually

Preparing the Purchases Budget in the Practical Reality

Budgets are all related to each other in the sense that the purchases budget is prepared after preparing the direct materials budget 

That is basically prepared after the production budget

The purchases budget is prepared every quarter or every month, and is divided into main raw materials and sub-raw materials

It begins with the amount of the production requirements of the raw materials (previous budget) * purchase price

The quantities and their prices should be taken into account, meaning whether the quantities will be purchased in tons or in kilograms because it will result in different purchase prices

Of course, the purchases budget is the main budget every quarter but is divided into monthly sub-budgets

An important point when preparing the purchases budget is to be there is a sub-budget for cash and credit purchases for the credit suppliers

The quantity of raw materials expected to be purchased from each credit supplier shall be specified because it will be linked to the cash budget of the company in terms of payments according to the credit period granted by the suppliers.

Direct Labor Budget 

Direct labor is the wages of production workers or the production supervisor of a production center in the sense that it is easy to identify, track, and manage costs; having data on the wages of the previous period, specifically the manufacturing cost, including direct labor, and indirect labor

Taking into account the increase in wages that occurs annually according to the company's system

Preparing the direct labor budget depends on two types of information, namely

1- Knowing the time of each operating phase or industrial process that is required to produce each unit of products in the sense that the factory is divided into production centers, service centers, and the production centers is necessary to know what number of operating hours each product needs in each production center and the cost of one hour of direct labor in each production center has the total number of operating hours and their cost that each product needs, and all this data and information is from the cost center.

2- Determining the labor rates in each of the manufacturing departments and production centers, and this data comes from the cost management because this information is related to the nature of industrial processes and production centers, so it will have like a chart that includes a brief description of each production center, the nature of the manual or automatic work, the number of workers in each center, the direct labor hourly rate and the estimated or standard time for each stage of operation.

As for the estimated or standard time rate for each stage of operation required to produce the product or the finished product, either is

1- Standard time rate and this if the company has a standard costing system in which standard rates are included

2- Average actual rates

This is done by analyzing the actual data on production records from previous periods; of course, this rate can change according to the change in the technical methods of production in each of the manufacturing departments and production centers.

Determining the labor rates.

It is calculated on the basis of actual labor records according to the previous data, meaning the rates are averages based on previous periods and are adjusted in light of the variables that receive wages during the budget period

Direct Labor Budget in the Practical Reality

First of all, the factory is divided into production centers; let it be the cutting center - slitter center

And then, we select each finished product, let it be xxx, to be produced, it first goes through the production center, let it be the cutting line, and let us assume that the production quantity of the product, and let it be 3000 units per month, and the standard time per unit produced (especially the cutting center)

Let it be 5 minutes (5/60) = 0.08

The direct labor hourly rate let it be LE50

So the direct labor costs of the product xxx = estimated production quantity during period * standard time per unit produced * direct labor hourly rate

And the same for the other production center that the product goes through, and thus we can calculate the cost of each product from direct labor