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Use these four steps to implement a Direct Material budget

by , 27 August 2014
You've noticed that your production expenses are a bit inflated, particularly when it comes to your raw material. So to help manage these expenses better, you draw up a Direct Material budget. This will help you control exactly how much raw stock you need and when you need it.

But now that you have your budget all ready, how do you implement it?

That's where we come in. Today, we're going to show you how to implement that new budget in just four easy steps...

 

Here's how to implement your Direct Material budget in just four steps

 
To show you how to implement your Direct Material budget, we're going to use the example of Peter's Building & Wooden Manufacturing. They need five square feet of blue motion cover per cupboard they manufacture.
 
Step #1: Peter estimates cost per square is R3.50. The demand for cupboards varies each quarter and scheduled production takes place accordingly.
 
Step #2: The business has some difficulty receiving one of its products in time. So it maintains a safety stock inventory on hand to ensure it can continue production.
 
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Step #3: Peter plans his ending inventory at the end of each quarter as 20% of the amount he uses every month. So the ending inventory varies over time, gradually increasing as production requirements increase.
 
Step #4: Peter can calculate his budgeted purchases. This is the formula he uses: He takes his Direct Materials he needs for production, plus his desired ending Direct Material inventory, minus the beginning Direct Materials inventory.
 
From there, it's easy to control how much stock you need and how much you want left over for just in case. It's easy and with those four steps Peter, and you, are able to easily implement a Direct Material budget. 
 

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