Direct materials budget

Definition

A direct materials budget estimates the quantity and cost of raw materials needed for production over a specific period. It helps ensure that there are sufficient materials to meet production goals while controlling inventory costs.

5 Must Know Facts For Your Next Test

1. It is often based on the production budget, which outlines the number of units to be produced.
2. The direct materials budget accounts for beginning inventory, required purchases, and ending inventory.
3. It helps in determining the timing and amount of raw material purchases.
4. This budget is crucial for cash flow planning as it impacts when payments to suppliers need to be made.
5. Accurate direct materials budgeting can prevent production delays and excess inventory.

Review Questions

• What components are included in a direct materials budget?
• How does the direct materials budget relate to the production budget?
• Why is accurate forecasting important in a direct materials budget?

Related terms

Production Budget:

A financial plan that outlines the number of units to be produced within a specific period.

Cash Flow Budget: A projection of an organization's cash inflows and outflows over a specified period.

Inventory Management:

The process of ordering, storing, using, and selling a company's inventory.