How do you calculate the total quantity of direct materials to purchase in a direct materials budget?

Direct Materials Purchases Budget In Managerial Accounting Definition

The direct materials purchase budget defines the direct materials that should be purchased by the business organization in a specific period of time period so that the requirements of the production budget are fulfilled.

Overview Of Direct Materials Purchases Budget In Managerial Accounting

A budget is a plan that every business organization makes. The budget is made to decide the amount to be spent on a particular department, over a particular period of time. The direct materials purchase budget is a type of budget prepared by a business organization to determine the amount of quantity of raw material required to be purchased so that the production target is achieved for a specified period of time. The manufacturing business organization usually prepares this budget on a monthly, quarterly, or yearly basis. The business managers decide the preparation of this budget.

The direct materials purchased budget can be calculated with the help of closing, and opening inventory. This calculation states the units of the direct materials that have to be purchased by the manufacturers with a period of time to meet the production targets.

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What you'll learn:

• Direct Materials Purchases Budget In Managerial Accounting Definition
• Overview Of Direct Materials Purchases Budget In Managerial Accounting
• Components Of Direct Materials Purchase Budget
• Format Of Direct Materials Budget
• Advantages of Direct Materials Purchase Budget

Components Of Direct Materials Purchase Budget

The components of the direct material purchase budget are the elements that are to be presented in the format of this budget. The direct materials purchase budget components are production level, opening balance of direct materials, the closing balance of direct materials, cost of direct materials, and the total quantity of raw materials.

• Production level - The production level defines the targeted production budget prepared by the business organization. The production budget indicates the production level targets by considering the total production capacity, and the market demand of the product to be produced. The base of the direct materials purchase budget is the production level calculated by the business organization. The production budget can be calculated by deducting the opening balance of finished goods from the summed-up value of the estimated sales, and the desired closing inventory of finished goods.

• Opening Balance of direct materials - The second component of the direct materials purchase budget is the opening balance of direct materials. Every business organization maintains an adequate level of closing inventory for any uncertain (sudden) future demands. This closing balance of inventory becomes an opening balance of the direct materials in the next accounting year. In other words, it can be stated that the closing inventory of a particular accounting period becomes an opening inventory of the next accounting period.

• Closing balance of direct materials - When the managers of an organization prepare the direct materials purchase budget, the expected closing inventory is also decided. After analyzing the amount of inventory that the business organization could store in the warehouse, this would be decided. Closing inventory of the direct materials, work in process inventory, or finished goods inventory is the inventory that the business organization would store at the end of the accounting year.

• Cost of direct materials - This is also an important component of the direct materials purchase budget format. The cost of raw materials must be purchased according to the standard price. For this, the business managers must know the unit cost of raw materials and the total cost of the direct materials.

• The total quantity of raw materials - This is also the main component of the direct materials purchase budget format. The total quantity of raw materials to be purchased is determined as per the needs of raw materials per unit.

Format Of Direct Materials Budget

The format of the direct materials purchase budget involves various components. These components include the production level, opening balance of direct materials, closing balance of direct materials, cost of direct materials, and the total quantity of raw materials. The production level is the first component of this format. It is calculated as follows:

• Expected Sales + Desired Closing Inventory of Finished Goods – Opening Balance of Finished Goods

The budget is prepared after this calculation. The format of the direct materials purchase budget is as follows:

The format of the direct materials purchase budget is as follows

Total direct material needed is the result of multiplication of product target, and required direct material per unit. Total materials to purchase, is computed by adding desired closing inventory, and subtracting opening inventory from the total direct materials needed. Total raw materials budget is calculated by multiplying cost per unit with the total materials to purchase.

Advantages of Direct Materials Purchase Budget

The advantages of the direct material purchase budget are that the inventory can be easily monitored, and the cash flows can be easily managed.

• Inventory - The main advantage of the direct material purchase budget is that the inventory can be easily monitored. In other words, it can be stated that the business organization prepares this budget to keep a check on the level of inventory. This budget ensures that there is no overstocking and understocking of the raw materials.

• Managing the cash flow - The other advantage of the direct material purchase budget is that the cash flow can be easily managed. With the help of this budget, no excess money gets trapped in the purchase of excess inventory. Hence, the cash flows of the business organization are managed in a better way with the help of this budget.