Basic Concepts of Materials Budgeting

Material budgeting refers to the procedure of preparing material or purchase budget in terms of quantity and money value of materials to be procured in a specified time period. Not only does it helps in estimating the material prices over a period of time, but also analyses the material requirement. Material budgeting ensures low risk of inventory planning, highest purchase lead time, low transportation costs and better vendor relations.

Direct Materials Budget: Proper material budgeting is of utmost importance, even when it comes to budgeting direct materials, which add up to the production cost of an organization. Correct budgeting can lead to better projections of direct material requirement. Here, direct materials (or simply, materials) refer to the supplies needed for manufacturing goods, and can also regarded as raw materials, stores, stock and productive materials.

Materials budget measures the materials to be purchased to fulfill the production budgetary requirements, and is generally presented in monthly or quarterly formats.

Total requirement for Raw Materials = for production + planned ending inventory

Raw Materials to be purchased = total requirement – beginning inventory

It is not possible to estimate the materials budget for every part component in inventory, as the estimation could be huge. As a matter of fact, it is customary to either make a rough estimation of amount of inventory required regarded as the total inventory, or expressed in terms of commodity type. Further, if you have an MRP software package with a planning module, you can perhaps create an appropriate materials budget by either of the means. The inclusion of the production budget into the planning module through this software helps create the expected materials budget for the ensuing period. In the absence of such software, the materials budget needs to be calculated manually.

For instance, Sharon Ltd. plans to manufacture an array of plastic goods, while 95% of its raw materials involve the purchase of plastic resin. Therefore, only one important commodity is of the prime concern here.

Sharon Limited – Materials Budget

for the year ended December 31, 2011

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Product A (units)	5,000	6,000	7,000	8,000
x Resin/unit (lbs)	2	2	2	2
Total resin needed (lbs)	10,000	12,000	14,000	16,000
+ Planned ending inventory	2,000	2,400	2,800	3,200
Total resin required	12,000	14,400	16,800	19,200
– Beginning inventory	1,600	2,000	2,400	2,800
= Resin to be purchased	10,400	12,400	14,400	16,400

The planned ending inventory for raw materials at the end of each quarter is projected to be 20% of the total resin amount during the month, and so the ending inventory differs over a period of time, and rising as production requirements increase. The planned increase can be attributed to the fact that Sharon Ltd has difficulties in receiving resin from its vendor in a timely manner, and therefore, it maintains a safety stock of on-hand inventory. The purchasing department envisages the global demand to intrigue the resin price, which is why it includes a slight rise in priced into Quarter 3, carrying it forward to the Quarter 4.

Five Easy Steps to calculate Materials Budget

Step 1: To start with, find out the exact amount of set of products to be manufactured. This stage is also known as the total order or the order size.

Step 2: Estimate the kind of raw materials you will require to manufacture your order. Identify the quantity as well as costing for each of the raw material requirements.

Step 3: The quantity identified in Step 2 will determine your total projected costs.

Step 4: The next step is to add costs for scraps or wastes removal, if any.

Step 5: Deduct the value of scrap materials which could be sold after manufacturing.

Material Consumption Budget: This is required after determining the production requirement. The material consumption budget is based on the volume of production. Material consumption per unit of output aids in preparing material consumption budget for various kinds of materials to be used by the output. Budgeted production volume multiplies with material per unit of output produces the budgeted material consumption which is thereafter multiplied with the purchase price per unit, and the budgeted material consumption value is as follows:

	Product A	Product B
Budgeted Production Units	xx	xx
Add: Material Consumption / Output	xx	xx
Budgeted Use of Materials	xx	xx
Purchase Price Per Unit	Rs            x	Rs            x
Budgeted Material Consumption Value	Rs          xx	Rs          xx

Material Purchase Budget: This is required by both manufacturing and merchandising companies.

For instance, manufacturing companies measures the quantity of materials to be purchased through production volume and inventory requirement. This along with the value of materials for the period budgeted and the materials inventory needed for sustenance. This is determined by considering the consumption for budgeted production volumes and opening and closing inventory requirement.

	Material A	Material B
Budgeted Consumption Units	xxx	xxx
Add: Required Closing Inventory	xxx	xxx
Total Requirement	xxx	xxx
Subtract: Opening Inventory	xxx	xxx
Budgeted Purchase Quantity	xx	xx
Budgeted Purchase Price Per Unit	Rs            x	Rs            x
Budgeted Material Purchases	Rs          xx	Rs          xx

Merchandising companies, on the other hand, prepare merchandise purchase budget, based upon budgeted sales units as well as on opening and closing stock of merchandise, and expressed in terms of units as well as price.

	Material
Budgeted Sales Volume	xxx
Add: Budgeted Closing Inventory	xxx
Merchandise Requirement	xxx
Subtract: Opening Inventory	xxx
Budgeted Purchase Quantity	xx
Budgeted Purchase Price Per Unit	Rs            x
Budgeted Purchase Value	Rs          xx

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