How to create a Direct Material budget in five easy steps
How many times have you gotten to the end of a financial quarter and realised you made a loss because you overspent on raw materials?
This is a hard financial area to control because you never quite know how much you'll need. It all depends on the markets, how well your product is doing and if there's a demand for it.
But that's exactly why you should draw up a Direct Material budget. It'll help you calculate and control the amount of raw materials you need.
Read on to discover how to draw up this useful budget in just five steps...
Follow these five steps to draw up a Direct Material budget
Step #1: Determine the total amount of product you plan to produce
This is your starting point. It's normally the amount of the product your buyer has ordered.
Step #2: How much of each material will you need and how much will each set of material cost you?
Identify and decide what raw material you'll need to produce your product order. Determine how much of each material you'll need and how much each set of materials will cost you.
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Step #3: What will you do if your material supplier can't deliver in the next quarter?
Add the units of planned ending stock. What does this mean? It's important to have material left at the end of each quarter. This is in case your material supplier can't deliver in the next quarter when your client needs you to manufacture a product.
Step #4: Take the total raw material you'll need for the quarter and add the targeted planned end raw materials
Add up the total expected units based on your figures from Step 2 and 3. To do this, you take the total raw material you'll need for the quarter and add the targeted planned end raw materials.
Step #5: The beginning raw material is also called the ending raw material of the previous quarter
Subtract the value of your beginning amount of raw materials to get the estimated units of materials you need to buy.
When production closes on the last day of a quarter or period, the material you don't use is called the 'ending raw material'. Normally, a manufacturing business would start the first day of a new quarter with the stock from the last day of the previous quarter.
There you have it, create a Direct Material budget with these five steps and you'll be able to manage your raw materials and production expenses hundred times more effectively.
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