The direct materials budget shows both the quantity and cost of direct materials to be purchased. The quantities of direct materials are derived from the following formula.
(Direct Materials Units Required for Production + desired Ending Direct Materials Units – Beginning Direct Materials Units) = Required Direct Materials Units to be Purchased.
The company then computes the budget cost to direct materials to be purchased by multiplying the required units of direct material by the anticipated cost per unit.
“The direct materials budget calculates the materials that must be purchased, by time period, in order to fulfill the requirements of the production budget.” Generally, it is presented in a monthly or a quarterly layout in the annual budget. This budget of a business selling products can contain chiefly all its incurred costs and so, it should compile the costs very carefully. Otherwise, the outcome or result can erroneously show excessively high or low cash requirements for funding materials purchases.
Use of the term in Sentences:
- The company’s accounts section is preparing the direct materials budget.
- The accounts manager is examining every detail with extra care so that the direct materials budget doesn’t show any erroneous result.
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