Material Budgeting | Direct Materials Budget


Material Budgeting | Direct Materials Budget:

Learning Objective of the article:

  1. Define and explain direct materials budget or Materials Budgeting.
  2. Prepare a direct material budget including a schedule of expected cash disbursements for purchases of materials.

Definition and Explanation of Direct Materials Budget:

Direct materials budget is prepared after computing production requirements by preparing a production budget. Direct materials budget or materials budgeting details the raw materials that must be purchased to fulfill the production requirements and to provide for adequate inventories. The required purchases of raw materials are computed as follows:

Raw materials needed to meet the production schedule
Add desired ending inventory of raw materials
Total raw materials needs
Less beginning inventory of raw materials

Raw materials to be purchased

XXXX
XXXX
——–
XXXX
XXXX
——–
XXXX
======

Preparing a budget of this kind is one step in a company’s overall material requirements planning (MRP). MRP is an operations management tool that uses a computer to help manage materials and inventories, The objective of material requirements planning (MRP) is to ensure that the right materials are on hand, in the right quantities, and at the right time to support the production budget. The detailed operation of materials requirements planning is covered in most operations management books.

Example of Direct Materials Budget:

Following is the direct materials budget for Hampton Freeze Inc. (See explanation of this direct materials budget)

Hampton Freeze, Inc.
Direct Materials Budget
For the Year Ended December 31, 2009

Quarter

1 2 3 4

Year

Required production in cases (see production budget page) 14,000 32,000 36,000 19,000 101,000
Raw materials needed per case (pounds) 15 15 15 15 15
———– ———– ———– ———– ———–
Production needs (pounds) 210,000 480,000 540,000 285,000 1,515,000

1

Add desired ending inventory of raw material 48,000 54,000 28,500 22,500 22,500
———— ———— ———— ———— ————
Total needs 258,000 534,000 568,500 307,500 1,537,500
Less beginning inventory of raw materials 21,000 48,000 54,000 28,500 21,000
———— ———— ———— ———— ————
Raw materials to be purchased 237,000 486,000 514,000 279,000 1,516,500
Cost of raw materials per pound $0.20 $0.20 $0.20 $0.20 $0.20
———— ———— ———— ———— ————
Cost of raw materials to be purchased $47,400 $97,200 $102,900 55,800 $303,300
======= ======= ======= ======= =======
Percentage of purchases paid for in the period of the purchase 50%
Percentage of purchase paid for in the period after purchase 50%
50% 50%

Schedule of Expected Cash Disbursement for Materials

2 Accounts payable, beginning balance $25,800 $25,800
3 First-quarter purchase 23,700 $23,700 47,400
4 Second-quarter purchases 48,600 $48,600 97,200
5 Third-quarter purchase 51,450 $51,450 102,900
6 Fourth-quarter purchase 27,900 27,900
———- ———- ———- ———- ———-
Total cash disbursement $49,500 $72,300 $100,050 $79,350 $301,200
1 Ten percent of the next quarter’s needs. For example, the second-quarter production needs are 480,000 pounds. Therefore, the desired ending inventory for the first quarter would be 10%  480,000 pounds = 48,000 pounds. The ending inventory of 22,500 pounds for the quarter is assumed
2 Cash payments for the last year’s fourth-quarter materials purchases.
3 $47,500 × 50%; $47,500 × 50%.
4 $97,200 × 50%; $97,200 × 50%.
5 $102,900 × 50%; $102,900 × 50%.
6 $55,800 × 50%. Unpaid fourth quarter’s purchases appear as accounts payable on the company’s end of year balance sheet

Explanation of the Direct Materials Budget for Hampton Freeze Inc.

The only raw materials include in this budget is high fructose sugar, which is the major ingredient in popsicles (finished goods of Hampton Freeze Inc.) other than water. The remaining raw materials are relatively insignificant and are included in variable manufacturing overhead. As with finished goods, management would like to maintain some minimum inventories of raw materials as cushion. In this case, management would like to maintain ending inventories of sugar equal to 10% of the following quarter’s production needs.

The first line in the direct materials budget contains the required production for each quarter, which is taken directly from the production budget (see production budget page). Looking at the first quarter, since the schedule of production budget calls for the production of 14,000 cases of popsicles (finished goods of Hampton Freeze Inc.) and each case requires 15 pounds of sugar, the total production needs are for 210,000 pounds of sugar (14,000 cases × 15 pounds per case). In addition, management wants to have ending inventories of 48,000 pounds of sugar, which is 10% of the following quarter’s needs of 480,000 pounds. Consequently the total needs are for 258,000 pounds (210,000 pounds for the current quarter’s production plus 48,000 pounds for the desired ending inventory). However, since the company already has 21,000 pounds in beginning inventory, only 237,000 pounds of sugar (258,000 pounds – 21,000 pounds) will need to be purchased. Finally, the cost of the materials purchases is determined by multiplying the amount of raw materials to be purchased by the cost per unit of the raw materials. In this case, since 237,000 pounds of sugar will have to be purchased during the first quarter and sugar costs $0.20 per pound, the total cost will be $47,400 (237,000 pounds × $0.20 per pound).

As with the production budget, the amounts listed under the year column are not always just the sum of the quarterly amounts. The desired ending inventory of raw materials for the year is the same as the desired ending inventory of raw materials for the fourth quarter. Likewise the beginning inventory of the raw materials for the year is the same as the beginning inventory of raw materials for the first quarter.

Direct materials budget is usually accompanied by a schedule of expected cash disbursements for raw materials. This schedule is needed to prepare the overall cash budget. Disbursement of raw materials consist of payments for purchases on account in prior periods plus any payments for purchases in the current budget period. Direct materials budget in our example includes such a schedule of expected cash disbursements. Ordinarily, companies do not immediately pay their suppliers. At Hampton Freeze Inc. the policy is to pay for 50% of purchases in the quarter in which the purchase is made and 50% in the following quarter, so while the company intends to purchase $47,400 worth of sugar in the first quarter, the company will only pay for half, $23,700, in the first quarter and the other half will be paid in the second quarter. The company will also pay $25,800 for sugar acquired in the previous quarter, but not yet paid for. This is the beginning balance in the accounts payable. Therefore, the total cash disbursements for sugar in the first quarter are $49,500–the $25,800 payment for sugar acquired in the previous quarter plus the $23,700 payment for sugar acquired during the first quarter.

You may also be interested in other articles from “Budgeting and planning” chapter:

  1. Profit Planning
  2. Participative or Self Imposed budgeting
  3. Human Factors in Budgeting
  4. Zero Based Budgeting (ZBB)
  5. Budget Committee
  6. Master Budget
  7. Sales Budget
  8. Production Budget
  9. Inventory Purchases Budget for a Merchandising Firm
  10. Material Budgeting | Direct Materials Budget
  11. Labor Budget
  12. Manufacturing Overhead Budget
  13. Ending Finished Goods Inventory Budget
  14. Selling and Administrative Expense Budget
  15. Cash Budget
  16. Budgeted Income Statement
  17. Budgeted Balance Sheet
  18. International Aspects of Budgeting

Other Related Accounting Articles:

Recommended Books !



Or

Download E accounting book in MS-word format for just 20 $ - Click here to Download

Leave a Reply

Your email address will not be published. Required fields are marked *