Budgeting Basics and Beyond

9.3. Materials Budgets

The materials and inventory budgets in a typical manufacturing firm involve a determination of:

• The quantities and cost of raw materials to be used.

• The quantities and value of materials to be carried in the inventory. The inventory balance depends on how long it takes to receive raw materials from suppliers after the order is placed.

• The quantities and cost of materials to be purchased. The amount to purchase considers expected production and raw material levels. The units of raw material needed equals the raw material usage multiplied by the units of production. In budgeting purchases, consideration should be given to expected price changes, interest cost to finance inventory, volume and cash discounts, desired delivery date, warehousing availability and cost, and obsolescence risk.

• The quantity and value of finished goods to be carried in the inventory

There are basically two methods of developing the inventory budget of raw materials:

1. Budget each important item separately, based on the production budget.

2. Budget materials as a whole or classes of materials based on selected production factors.

Practically all companies must use both methods to some extent.

Budgeting Individual Items of Material

Six steps should be taken in budgeting the major individual items of materials:

1. Determine the physical units of material required for each items of goods that is to be produced during the budget period.

2. Accumulate these into total physical units of each material item ...