James recently wrote to the accounting helpdesk with a problem. He never orders the right amount of stock to meet demand. He either orders too much stock, and then sits with the problem of paying warehouse fees and dealing with stock damage, or he orders too little, and can't meet demand.
Well James, it sounds like you need to plan a bit better. And there's quite a simple solution! You need a Direct Material budget! Let's have a look at this solution and the six easy steps you can take to create your direct material budget.
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Order the perfect amount of stock every time with these six steps
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
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.
Step # 3
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
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.
Keep reading for the last two steps to create your Direct Material budget.
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The final two steps for creating your Direct Material budget
Step # 5
Subtract the value of your starting amount of raw materials. This will enable you to get the estimated units of materials you need to buy.
Step # 6
Calculate the cost of buying the raw material. How? Just enter the estimated cost per unit. To see what each unit will actually cost you, you must enter the cost per unit on your Excel sheet.
For the A-Z of Direct Material budgets, including examples, red-flags to avoid, and a Direct Material budget template to get you started, turn to chapter B06: Budgets: Direct Material budget in your Practical Accountancy Loose leaf
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Until next time,
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